Any sucess stories with an interest only mortgage loan?

[Fairy Enchantress]

I always here how horrible it is from everyone. So I was wondering if any one has had sucess.

Maybe getting the interest only loan; and selling a few years later.

Are the interest only loans very hard to get?

[merkurfan]

Mortgages of any type are hard to get right now. if your not a prime canidate you will likely have trouble finding anything.

[Fairy Enchantress]

I am not even close to being a prime canidate.

But my friend did this. I am so baffled by it. So I was wondering if there are people who actually made a ton of money doing it.

She bought the place in a very wealthy area.And so far she rented the place out and now moved into the home. I think she will do good, well I hope she does.

So many people stay away from those loans. I took a home buyers class and the lady there said the interest only loans were easy to get but almost everyone goes in to foreclosure who get them.

[merkurfan]

I would use a interest only on a investment property that I planed to pump and dump (AKA flip that house) but NEVER on anything I planned on owning very long.

[Fairy Enchantress]

Yeah, that what I was thinking. I will have to ask her why she moved in to it.

[jq26]

Many, many, many people have had success with an IO loan. The news media doesn't advertise the large % who do well but they show the slim minority that do poorly. IO loans aren't even that bad...it is the Option ARMs that really get people into trouble if they don't know the ins and outs of how their loan amortizes. If you don't service the minimum interest that accrues it doesn't just disappear but it reappears in added principal. Then when the principal rises to a certain pre-determned trigger point, POOF, your payment rises to meet a) the full interest on the larger principal, the amortization to pay off the larger principal (now on a compressed schedule due to the lack of amortization during the initial "free lunch" period). Throw in the rate adjustment that occurs as agreed and you now have people befuddled why their $800 monthly payment just became $1500. It is all there in black & white. The time value of money has a cost and must be paid back. Option ARMs are a way for you to leverage yourself even more if you are expecting serious appreciation on a short term situation (ie: reduce monthly carrying costs but pay these costs back at the end when there is a large gain). This is less risky and advantageous when real estate was skyrocketing, a lot more more risky when home prices are flat, and just downright foolish with depreciatng real estate (unless you are flipping and are a professional).

IO loans are not quite as risky as the Option ARM due to the lack of an option to service less than the required interest which results negative amortization. But you still have a) the eventual rate increase if it is also an ARM, the shortened amortization schedule if it is an ARM (ie higher principal payments), and c) the lack of a reduction in principal to contend with.

It is not as if IOs make you money, it just reduces your payments a little bit. But remember that the principal must be paid back somehow. If you defer this task by a few years with an IO ARM or forever with some sort of long-term IO with a balloon payment, at some point that money will come due. For most, probably not worth it. And banks & investors know this and have effectively shut down the funding pipeline for this type of money.

My primary residence note is in an IO ARM (fixed at 5% until late 2010). I have already started paying back principal anyway- ahead of schedule. However, the "savings" that was received every month by being in the IO ARM allowed me to invest money elsewhere (stock, bonds, larger 401k contributions, rental property). I think that is an example of a successful use of an IO. Had I pissed the monthly savings away on a car, furniture, or a trip to Vegas, then I think it would have been an unsuccessful use of an IO. Just my 2 cents.