Interest only loans

[IHateMyJob2004]

Does anyone know if adding principle to monthly payments would reduce the monthly interest charges or would those remain constant no matter how much principle is paid off?

EDIT: Cliif notes/explanation down about 10 posts. CLEARLY MARKED!

 

[dullard]

Probably depends on the loan. On my personal loans (not interest only loans but that probably doesn't matter), any extra principal I apply does reduce interest in all of the remaining months. But check your loan details carefully. Some may be worded in a way that you are forced to fork over the interest no matter what you do.

 

[Budmantom]

yup

 

[IHateMyJob2004]

Originally posted by: Budmantom
yup

yup for interest only loans or yup to dullard? If that's true for interest only loans, I am very happy! I e-mailed e-loan aobut htis so hopefully I'll get a verification. COuld take up to 2 days though

dulalrd,
Totally agree with you on the "traditional" mortgage. Yahoo! finance has a nice calculator to see the impact that paying down principle has. Gives you a month by month breakdown of where the payments go if you pay extra principle towards the mortgage.

 

[kranky]

I believe it depends on the type of loan; i.e. how it is structured.

A mortgage loan is a simple interest loan, so if you pay extra, the amount of interest charged the next month will be less (even though the payment amount won't change).

But there are some types of loans, like add-on or discount types, for which paying extra doesn't really help you.

 

[AgentEL]

From what I read, some loans let you and some don't. It depends on the terms of the loan.

 

[dullard]

I bet you will get your interest reduced. Only shady loans will be different. One example: the 0% financing on several car lots in the past couple of years did this. It was 0% financing for ~2 years on a 5 year loan with payments NOT reducing interest. Thus those people just got suckered into a high interest loan.

Do you mind if we pry? What is the loan for and why did you get interest only loan if you have money to make principal payments?

 

[Mayfriday0529]

Originally posted by: AgentEL
From what I read, some loans let you and some don't. It depends on the terms of the loan.

its true i have one my loans that states that if i pay more from my monthly payment it will be forward to the next month payment.

 

[IHateMyJob2004]

Originally posted by: dullard
I bet you will get your interest reduced. Only shady loans will be different. One example: the 0% financing on several car lots in the past couple of years did this. It was 0% financing for ~2 years on a 5 year loan with payments NOT reducing interest. Thus those people just got suckered into a high interest loan.

Do you mind if we pry? What is the loan for and why did you get interest only loan if you have money to make principal payments?

UPDATE: re-writing this now....confusing admitadly
medium length story:

Well, we are buying a home this summer. Probably in the $450K ball park. We have the 20% down...from when we'll sell our current home. Since it's 9 months away, we can't find a mortgage now and rates are bound to go up. We already have the home picked out. We are buying it from our in-laws.

I am an engiener and can afford the payments for a traditional mortgage. No CC debt. Car laon could be paid off if needed (only $7000 left on it and we have the cash to pay it off). For the price though, I've done some snooping and I doubt that a mortgage lender would agree. But if we got an interest only loan, we could easily get that loan. And our return from investment would easily outpace the interest rate, so interest only actually makes sense.

Why pay principle down? Well, my wife is a certified teacher. Not full time yet, but that is 2 years away at most. Since interest rates should go up, I'd rather keep the interest only loan if possible and make payments towards principle. But if the payments towards principle don't reduce the monthly interest charges, that makes no sense and i'd re-evaluate my options.

PS: I want to have the home paid off in about 12 years. The actual intention is to start paying it off about 6-8 years after we buy the home.

Fiances.... isn't it fun

 

[dullard]

I had to read that 3 times and I'm still missing a link. Maybe my brain is fried. Is this correct?

[*]Want loan now for house since interest rates will go up.
[*]Can only qualify for interest only loan for mortage now.
[*]Cheaper to pay interest for 9 months when you don't have the house than to risk higher interest rates later.

If so, there may be another option. Some mortgage places will allow you to buy a lock on interest rates. It may be ~$2000 but you could lock in todays interest rates and not get the loan for several months. If you can do that, this option would be cheaper than interest for 9 months.

 

[IHateMyJob2004]

Originally posted by: dullard
I had to read that 3 times and I'm still missing a link. Maybe my brain is fried. Is this correct?

[*]Want loan now for house since interest rates will go up.
[*]Can only qualify for interest only loan for mortage now.
[*]Cheaper to pay interest for 9 months when you don't have the house than to risk higher interest rates later.

If so, there may be another option. Some mortgage places will allow you to buy a lock on interest rates. It may be ~$2000 but you could lock in todays interest rates and not get the loan for several months. If you can do that, this option would be cheaper than interest for 9 months.

Hrmm, I think I should re-write that.... One sec.

 

[IHateMyJob2004]

I'll try to rewrite that.

CLIFF NOTES:clock:
CLIFF NOTES:clock:
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Scenerio:
1) Have a house lined up. We will close on it in about 9 months.
2) Current income dictates that interest-only loans are probably the only viable method.
3) Future income (1-2 years out) should significantly increase as my wife becomes a full time teacher.
4) Due to my wife's future pay hike(3), we could start paying principle down on the property and put a BIG dent in it fairly quickly.

Question: Since it's an interest only loan, it only makes sense to pay principle down if future payments would be lower.

GOAL) Pay home off in about 12 years.
method 1) Start paying down principle in 6 years.
method 2) Save till year 12 comes. Simply eliminate all debt.

method 1 only makes sense if the monthly payments were reduced since we are paying down principle. If monthly interest-only payments will not be effected by paying down principle, we are better served to simply pay off the debt 12 years from now in one shot.

CONCLUSION THUS FAR) Seems as though it matters o nthe loan terms. probably should just ask the lender, but I am addicted to ATOT!

 

[IHateMyJob2004]

Bump: last bump I'll do.

 

[Vic]

I haven't read the entire thread, but yes, on ALL interest-only mortgages if you pay down any principal then the remaining monthly interest-only minimum payments will be reduced.

Less principal = less interest accrues each month, and it IS an interest-ONLY loan. Calculating monthly interest is easy. Take the principal balance multiplied by the interest rate in percentage (i.e. 5.75% = 0.0575) divided by 12. For example, ($450,000*0.0575)/12 = $2,156.25 monthly accrued interest. Reduce principal balance by $50k and you get ($400,000*0.0575)/12 = $1,916.67

Be advised though, all interest-only loans allow interest-only payments for just the first 10 years (120 months). Then they reamortize into full principal and interest payments for the remaining 20 years (240 months), depending on the remaining principal at the 120 month mark.

I sincerely doubt that there is any lender out there who allows a borrower to lock in a rate 9 months (270 days!) in advance, especially when most locks are from 20-45 days. There are some who do allow 6 month (180 day) locks, but doing so is generally quite expensive (lock fees are always calculated as a percentage of the loan amount) and I usually advise against it. No one has a crystal ball, and you might pay an expensive lock fee up-front only to find that rates are similar 6 months down the road.

 

[IHateMyJob2004]

Originally posted by: Vic
I haven't read the entire thread, but yes, on ALL interest-only mortgages if you pay down any principal then the remaining monthly interest-only minimum payments will be reduced.

Less principal = less interest accrues each month, and it IS an interest-ONLY loan. Calculating monthly interest is easy. Take the principal balance multiplied by the interest rate in percentage (i.e. 5.75% = 0.0575) divided by 12. For example, ($450,000*0.0575)/12 = $2,156.25 monthly accrued interest. Reduce principal balance by $50k and you get ($400,000*0.0575)/12 = $1,916.67

Be advised though, all interest-only loans allow interest-only payments for just the first 10 years (120 months). Then they reamortize into full principal and interest payments for the remaining 20 years (240 months), depending on the remaining principal at the 120 month mark.

I sincerely doubt that there is any lender out there who allows a borrower to lock in a rate 9 months (270 days!) in advance, especially when most locks are from 20-45 days. There are some who do allow 6 month (180 day) locks, but doing so is generally quite expensive (lock fees are always calculated as a percentage of the loan amount) and I usually advise against it. No one has a crystal ball, and you might pay an expensive lock fee up-front only to find that rates are similar 6 months down the road.

You are my new god! Thanks

Not intending to lock a mortgage right now. Mortgage rates should be higher than they are today, so I'm simply assuming that if I can't afford a traditional 15 to 30 year mortgage now, that the fact that I need an interest only loan won't change 9 months from now

Most Interest only loans are indeed ARMs. I have found some 30 year ones though and they look very reasonable. eloan.com is a great place for this. Hard to find the interest only loans there, but it seems that they have them available for everything. 5/1, 7/1, 10/1 ARMS and 15 or 30 year fixed rate are all available in CT as interest only loans.

 

[Vic]

Originally posted by: IHateMyJob2004
You are my new god! Thanks

Not intending to lock a mortgage right now. Mortgage rates should be higher than they are today, so I'm simply assuming that if I can't afford a traditional 15 to 30 year mortgage now, that the fact that I need an interest only loan won't change 9 months from now

Most Interest only loans are indeed ARMs. I have found some 30 year ones though and they look very reasonable. eloan.com is a great place for this. Hard to find the interest only loans there, but it seems that they have them available for everything. 5/1, 7/1, 10/1 ARMS and 15 or 30 year fixed rate are all available in CT as interest only loans.

No problem, just glad I can help.

Interest-only loans are available both fixed and ARM and in almost any program provided it has a 30 year amortization.

For what you are looking for, a $400k loan with 20% down, I would recommend a traditional Jumbo loan program. It would offer the lowest rate and the least cost add for the interest-only option.