is an mortgage interest only payment a good idea? There would be a 10 year baloon payment.?

I have a cousin that is buying a town home, and she has been advised to get a mortgage where she is going to pay the interest only. My cousin said that the loan would have a balloon payment in 10 years. She has sold her condo, so now she would like to get a new town home to be near her children in another state. She will be putting down $100,000. on a purchase of $440,000. The idea is to make the monthly mortgage payment more manageable for her.

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  • 8 years ago
    Favorite Answer

    The general consensus (and this is verified by the answers already given) is that a 10-year balloon loan is not a good option for most people.

    Let me start by saying that for most people a mortgage loan that has fixed monthly payments carries the least risk. If the only reason that you can only afford a mortgage loan is because you are paying interest only (or negative amortization), extremely long payment schedule (40 or 50-year loan), or a low teaser interest rate, then you should reconsider taking the loan. In fact, those types of loans are harder to get today.

    If there is one lesson we all learned, it is that housing prices do not always rise. Does your cousin have a plan in 10 years. Can she afford to lose her downpayment? And what happens if the value of the home does not cover the loan? Remember, there are other costs to owning a home including property taxes, homeowners insurance and HOA.

    Interest only loans can be appropriate for people who have uneven cash flows, for example:

    Self-employed with seasonal income

    Employees who receive large annual bonuses.

    Young people who are starting a career, with a strong outlook for steady increased income.

    Anyone who can afford to carry the risk of a higher monthly payment, but wants to use the extra funds for investment purposes or college education.

    If your cousin does not have other assets to cushion the risk, then I advise that she look into a 30-year mortgage. If she can't afford that, then the house is probably too expensive for her budget.

  • 8 years ago

    A lot that of the homes have been foreclosed or are in the process of being foreclosed are the result of interest only mortgages. Property values declined and those mortgages ended up being more than the current value. Folks are unable to refinance those balloon payments.

    Your cousin should consider buying less home and getting a regular mortgage payment that she can afford.

    Source(s): BD
  • Rob
    Lv 7
    8 years ago

    She is getting shafted , ripped off .

    she does not understand that house rates

    are the lowest in 60 yrs.

    where does she think rates will go ? UP is only way.

    interest only means in 10 years she will refinance

    330K at higher rates figur at least 7%

    not 3% now.

    she need better info than buying aa 440K town house.

    have her read "house buying for dummies" Collier.

    lots of factors determine if this is a really dumb idea.

    Source(s): foreclosure buyer
  • 8 years ago

    She'll end up paying more in the long-run if she goes that route... especially if, in 10 years, she can't afford that balloon payment.

    It's almost always better to pay down the principle balance. As you pay down the principle, the interest goes down as well.

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  • 8 years ago

    no

    ONLY if you can get a non prepayment penalty clause and then

    after 3-5 yrs, pay it off. Keep in mind during an interest only loan

    you gain no reduction of the principle.

  • 8 years ago

    Interest only mortgages are rarely a good idea.

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