Quote:
Originally Posted by wade moore
One of the main ones being "interest only" loans where for the first say 3-5 years you ONLY pay interest - nothing on the principal and then it would cause mortgage payments to be say 1/2 or 1/3 of what it would be. But once that 3-5 years passes the payments skyrocket as they have to start paying off the principal.
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Not to nitpick, but this is a pretty big exaggeration. No matter what product you pick, the early years of your loan will be paid back almost entirely in interest. As anyone who has needed to sell their house shortly after buying it could tell you, you're automatically behind the 8-ball when you factor in closing costs and other fees because you haven't paid down any of the principal balance.
Take a $250k loan at 7%. Your monthly payments on a 30 year fixed will be $1,663. During the first year, you will pay an average of about $1,450 in interest each month, for a total of $17,419 over the course of the year. Meanwhile, you've only paid down $2,500 in principal. So you're saving a couple hundred a month and gambling that your house will appreciate to the point where that is how you're technically paying down the balance.
The huge payment changes arise more from the changes in rates when they reprice. An IO at 4.5% is much different than the fixed at 8%.