Interest only loan vs. traditional mortgage?

PLEASE READ CAREFULLY BEFORE ANSWERING:

For long term OR for short term... A loan salesman told me an interest only loan is better than a traditional one.

He said that if I take the difference in payments (interest only being cheaper; monthly) and add that to my payment, I'll have paid off more in principal in 5 years.

i.e. $2K a month interest only vs $3K a month traditional. Take that $1K a month in difference and USE IT ... apply it to paying down the principal on the interest only... and in 5 years I will have paid off more principal on the home than with a traditional mortgage. And I could refinance/sell/whatever and be in a better financial position.

So, after 5 years with interest only, paying an aditional $1K a month for principal, I will have paid off $60,000 of principal.

Even if I refinance, the loan amount will be $60K less, therefore, a lower monthly payment.

***YOURE ANSWER SHOULD FIND THE PROBLEM WITH THE LOGIC***

Interest only loan vs. traditional mortgage?

Logic says that if the difference between the loans is how the principle is paid then it is clear you should pick the loan where the principle pay back is automatic.

If you look at an amortization schedule on a %26quot;normal%26quot; P%26amp;I loan you will find that each month you pay the intrest on the outstanding balance and the remainder pays down the principle. The other loan is intrest only and will never pay off the loan unless you match the P%26amp;I (or better) on the other loan. I think the loan officers math is faulty.

The intrest only loan does give you more flexible but for me that would be dangerous.

Interest only loan vs. traditional mortgage?

your Q is to long to read, but I'll ans the prelude; interest only is only good for short term loans, knowing well you can get out of them by the anni-date.

fixed gives you the breathing room in the event you falter and the rates are lower, but Int-only fees are high and they drain your blood if you're not a real player and have a back door to bail you out.

Interest only loan vs. traditional mortgage?

Your question is too long and I don't have time to do the math for you. But let me say this, most of the foreclosure you are hearing about today?... %26quot;interest only loans%26quot;. If you're interested in buying down the mortgage, then either put more money down, or change to a 15 years mortgage.

If you plan to have this loan a very short period of time, say 6 mths to 1 year, ok fine. But know what your next step is before you sign for that interest only loan, meaning are there any prepayment penalities.

...and you could very well be upside down in the loan.

Interest only loan vs. traditional mortgage?

The devil in the woodwork is that the interest is not fixed. In a traditional mortgage you are assured that the interest will not go up for the entire length of the loan.

If the world was perfect all that would work out fine but two things are likely to happen to put a fly in that ointment. The salesman knows it and is planning on it.

The first is that interests will rise, possibly very rapidly after 2008. The system is being heavily gamed, but all the deficit spending, and all the American over extension, and a slipping economy will come home to roost before the house is paid for.

Refinance will do you no good if the rates are as high as the the new floating interest so things would go very much more expensive.

The other thing they count on is that you will not pay off the Principal right away, as interest and just life puts a squeeze on the money. When people can get away with paying less for a while they often do, even if the real hurt is put on down the road.

Interest only loan vs. traditional mortgage?

i got the similar example from one mortgage brokers i talked to last week. even though, he sounds very believeable, my guts is telling me that he's playing the financial engineering means here.

like others mentioned, when you refinance after the Interest Only loan' agreed period, you'll have to pay additional transaction fees such as closing cost ... which you won't have the issue with fully amortized Principal + Interest loan.