Angel M asked:
There’s a company that’s offering 1.5% APR interest only loan for anyone that has a credit score of 620 or above. They advised that if I take the $800 in savings and invest it, I can use the savings to pay off all of my outstanding debt. In 5 yrs after the loan is over we would do it again but because it’s interest only that I’m paying the amount of the new loan will be more than the original loan. We just need some professional advise.
There’s a company that’s offering 1.5% APR interest only loan for anyone that has a credit score of 620 or above. They advised that if I take the $800 in savings and invest it, I can use the savings to pay off all of my outstanding debt. In 5 yrs after the loan is over we would do it again but because it’s interest only that I’m paying the amount of the new loan will be more than the original loan. We just need some professional advise.
Have you not heard about all the fuss surround mortgages?
Ok, if you take an interest only loan, you don’t pay any principal. If after a few years of not paying principle you stand a good chance of being upside down in the loan. Meaning you would owe more than the property would sell for. Now if you were going to do this for less than 6 months to 1 year, it might be ok. But don’t risk your investment and equity to save a few bucks now and waste it all later. No Don’t Do An Interest Only Loan.
He is offering you a negative amortization loan or in the mortgage world an option arm. It has 4 payment options
1 minimum payment
2 Interest Only
3 15 year payment
4 30 year payment
Here is how it works if your loan amount is say 100,000 and you take an option arm at a fully amortized rate (meaning the index plus the margin) say that rate is 7% they will also give you a start rate of the 1.5% you mentioned if you pay the minimum payment based on that start rate you are deferring interest meaning as many times as you do that you are adding to the principle of your loan. Here are your payments based on the hypothetical loan amount and rate listed above
Minimum on 1.5%= 345.12
interest only based on 7%=583.33
15 year based on 7%=898.83
30 year based on 7%=665.30
as you can see the difference between the minimum payment and the interest only is 238.21 so every time you pay the minimum payment you are adding 238.21 to your principle balance in turn you could possibly owe more than your house is worth. At that time the bank will take the minimum payment option from you and you will be left paying an amount you probably cant afford and will not be able to refinance because you now owe more. If i were you i would make your loan officer explain everything to you so you can understand it before signing anything because you could be screwed in the long run and your loan officer is going to make a ton of money. I dont want to solicite your business but i want you to understand what you are getting yourself into so if you have any questions please email me.
There is no such thing as a 1.5% interest loan. At a 1.5% pay rate (NOT interest rate) you are not paying any principle, and only a small part of the interest. The rest is being added to your principle balance. If it were an interest only loan, you would not be adding to your principal balance each month- you’d be staying even. Either you agent isn’t explaining the loan to you correctly or you don’t understand the explanation. This is a negative amortization loan, and with home values stagnating and even dropping in some areas this is a very bad idea. Unless you know of a can’t-lose investment for your extra $$$ ( which of course doesn’t exist, or we’d all be doing it) and have the commitment of a saint to put your money into it every month in order to make up the difference, you’d be crazy to take this deal. Your agent is one of those vampires that give the rest of us a bad reputation. Run away as fast as you can.