Interest-Only Mortgage Loans: Why They Should Be Illegal

[momentum]

see this English text

interest-only mortgageloans are bad for Americans and should be made illegal.These mortgages require a borrower to pay only the interest on the loan.Owners won’t accumulate equity based on the increasing value of their house.

>>owners won’t accumulate equity based on the increasing value of their house.

what this means 'increasing value of their house'? I'm not clear here.

..not getting the concept in this line Owners won’t accumulate equity based on the increasing value of their house.

any native english speaker ? or someone knows better english ?

 

[mgb_phys]

It should be owners will ONLY accumulate equity based on the increasing value of their house.

 

[momentum]

'accumulate equity' means what ?

 

[mgb_phys]

Have more money than you started with

Or rather have less debt than you started with. Equity is the money in the house once you have paid the loan - hence negative equity is when the house is worth less than the remaining loan amount

 

[Evo]

'accumulate equity' means what ?

You owe $10 for your house, it's now appraised for $20 (meaning that you should be able to sell it for $20)the difference in the price you owe on the house and what it's worth is the equity. Your equity in this case in $10. It's not a guarantee that you can get $20 for your house, but is considered a fair estimate.

If someone pays only interest and no principle on their mortgage loan, they won't accrue equity as fast as someone that pays against the pricipal (amount owed), but it doesn't mean that they won't gain equity if the house appreciates (goes up in value).

Ok, this is where the confusion comes in. It's the misunderstanding of people that don't understand interest and principle.

This explains it.

http://www.mtgprofessor.com/A - Interest Only/misperceptions_about_interest-only_loans.htm

 

[mynameinc]

You owe $10 for your house, it's now appraised for $20 (meaning that you should be able to sell it for $20)the difference in the price you paid for the house and what it's worth is the equity. Your equity in this case in $10. It's not a guarantee that you can get $20 for your house, but is considered a fair estimate.

If your house is worth $20, you have more issues than an interest-only mortgage. ;) What he said is right. But, in a normal mortgage, since you would have paid on the principal, you would have a little more than $10.

 

[rootX]

I think it says that you lose all of 10$ because you are paying the interest.

Edit: Looks wrong (see Astronuc)

 

[momentum]

You owe $10 for your house, it's now appraised for $20 (meaning that you should be able to sell it for $20)the difference in the price you owe on the house and what it's worth is the equity. Your equity in this case in $10. It's not a guarantee that you can get $20 for your house, but is considered a fair estimate.

so equity is a kind of profit margin then. because i see my house can fetch 20$-10$ =10$ if I sell now ...so I can say now this is accumulating equity ..right ?

i get some point now.

but it says "Owners won’t accumulate equity based on the increasing value of their house"

as there is a 'increasing value of their house' so they equity / profit margin should also increase ! why they say 'Owners won’t accumulate equity' then ? this is contradicting.

 

[Astronuc]

On interest only mortgage, one pays only interest, and has no equity (ownership).

The only way to accumulate equity is to pay off the 'principal' of the loan, which is the money borrowed. The interest is the cost of the loan to borrow the principal.

Ideally the value of the house appreciates, but that it no guarantee.

Equity is what one keeps when one sells the house.


The difference between what one pays for the house and what one receives for the house would be profit or capital gains. When one pays off a mortgage early, one simply pays the remaining principal and interest, and hopefully has some money (profit) remaining.

 

[mgb_phys]

so equity is a kind of profit margin then. because i see my house can fetch 20$-10$ =10$ if I sell now ...so I can say now this is accumulating equity ..right ?

Yes, but you also accumulate equity by paying off the capital part of the loan.
If the loan is $30, you pay back $20 (of which $10 is interest and $10 is capital) then you have $10 of equity - if the house only sells for $30 you still get $10 after paying the bank it's remaining $20

but it says "Owners won’t accumulate equity based on the increasing value of their house"

That's wrong, (a typo or an error) if you have an interest only mortgage you only make money if the value goes up, otherwise at the end of the loan you sell the house and only have exactly enough money to pay the loan

 

[Evo]

so equity is a kind of profit margin then. because i see my house can fetch 20$-10$ =10$ if I sell now ...so I can say now this is accumulating equity ..right ?

i get some point now.

but it says "Owners won’t accumulate equity based on the increasing value of their house"

as there is a 'increasing value of their house' so they equity / profit margin should also increase ! why they say 'Owners won’t accumulate equity' then ? this is contradicting.

I think if you read the link I posted it will clarify it.

 

[turbo]

Today's banking industry is not unique in structuring predatory loans. When my father took out a mortgage on our first non-rental home, the mortgage was simple and straightforward. He worked all the overtime he could get, and paid extra down on the principal every month. A year or two later the bank tried to restructure the mortgage so that he had to pay penalties for early repayment of the principal. He had to hire a financial advisor to fight that, and won. This was back in the early '60's. A hard-working millworker supporting a family of 6 shouldn't have to fight off a bank that's trying to skin him.

 

[momentum]

Yes, but you also accumulate equity by paying off the capital part of the loan.
If the loan is $30, you pay back $20 (of which $10 is interest and $10 is capital) then you have $10 of equity - if the house only sells for $30 you still get $10 after paying the bank it's remaining $20That's wrong, (a typo or an error) if you have an interest only mortgage you only make money if the value goes up, otherwise at the end of the loan you sell the house and only have exactly enough money to pay the loan

You are right ...it was a typo.

tell me one thing, Can I sell my house anytime ? or I can sell only after the interest part is paid off to bank ?

For example, say a person took £200,000 at 5% interest only and pay over 30 years. After 30 years the interest is paid off however the person still owes the original £200,000.

can he sell his house during this 30 year period ? or he can sell his house only after 30 years whenever the interest is paid off ?

whats the rule ?

 

[Evo]

You are right ...it was a typo.

tell me one thing, Can I sell my house anytime ? or I can sell only after the interest part is paid off to bank ?

For example, say a person took £200,000 at 5% interest only and pay over 30 years. After 30 years the interest is paid off however the person still owes the original £200,000.

can he sell his house during this 30 year period ? or he can sell his house only after 30 years whenever the interest is paid off ?

whats the rule ?

Read the link http://www.mtgprofessor.com/A - Interest Only/misperceptions_about_interest-only_loans.htm

 

[turbo]

tell me one thing, Can I sell my house anytime ? or I can sell only after the interest part is paid off to bank ?

You cannot sell your house on your own unless you have title to it. In the US, lawyers do title-searches to see who has claim to the assets represented by your house (among other things), and your creditors have first dibs on the proceeds on the sale. After your debt is satisfied, the excess in yours. This happens in a very controlled environment to ensure that the banks get their cut first.

 

[momentum]

I feel comfortable now.

Thanks for clearing up the concept.

This was very much helpful.

 

[Evo]

You cannot sell your house on your own unless you have title to it. In the US, lawyers do title-searches to see who has claim to the assets represented by your house (among other things), and your creditors have first dibs on the proceeds on the sale. After your debt is satisfied, the excess in yours. This happens in a very controlled environment to ensure that the banks get their cut first.

That's a bit misleading, you can sell your house as long as the person that holds the loan is satisfied financially.

Depending on your mortgage, you might be able to let someone assume your mortgage (meaning they will take over your loan) and you get to keep any equity (profit) there might be.

Usually the new buyer will get a new loan that pays off your loan and pays you any equity.

Sometimes, (usually if it is a cheap house) the buyer might pay cash.

You're not prevented fom selling your house before the mortgage is paid.

 

[turbo]

You're not prevented fom selling your house before the mortgage is paid.

No, and I didn't say that. Your house may have a number of encumbrances, and all of them have to be satisfied before you get your cut (if there is anything left). When we bought this place, the "owner" had a mortgage AND a 2nd mortgage that he took out to make home improvements back when the money was flowing freely. I hired a lawyer that I trust implicitly to search the title of this place and make sure that all encumbrances would be cleared at closing. She is an old and trusted friend.

I paid for this place with a personal check, and the real estate agent told me that I'd have to go to a bank to get a cashier's check. Becky told him to shut up and take the check. She was a *bit* more civil about it, but not much.

 

[Evo]

You always need to do a title search. There could be a lien against the house from someone the owner did business with and owes them money.

In some states, like Texas, you are allowed to claim that you are homesteading and no one can place a lien against your home. Kansas does not allow that.