Q2006 and interest only loans

Hi, George.

??

An interest-only loan does not amortize! After 10 years of interest-only payments, the balance will still be the same as today.

Or did I misunderstand what you said?

RC

If you didn't misunderstand then is it any wonder what is causing the current sub prime and credit problems/worries in the market today? People clueless about finances!

Forgive me if I'm wrong, but isn't an interest only loan interest only? The amortization is going to be the same every month, you pay the interest and the balance remains the same.

You understood correctly. But at the end of the 10 years wouldn't you then have 20 years of principal to amortize (assuming a 30-year fixed rate loan) with 10 years of interest already paid? I think this is the amortization my friend wants . . .

Thanks!

George snipped-for-privacy@nospamcomcast.net

Hi, George.

I don't think you've really thought this thing through. You are still "thinking INSIDE the box". ;^}

If you have a 30-year loan for $100,000 at 6%, the interest for the first month is .5%, or $500. If your monthly payment is $600, then your first payment pays $500 interest and $100, reducing your balance to $99,900. Your next month's interest is .5% x $99,900, or $499.50, letting $100.50 apply to your principal, bringing your balance down to $99,799.50. Each month, of course, interest will be slightly less, letting slightly more go to amortize the loan. "Amortize" is related to words like "mortal" and it means to slowly "kill" the loan, which the principal portion of each payment does.

But if that is an interest-only loan, then EVERY month's interest will be $500, the monthly payment will be only $500, and nothing will be paid to "amortize" the principal. After one month, after one year, and after 10 years, the loan balance will still be $100,000.

What happens after 10 years of interest-only payments depends on the terms of that specific loan. Maybe the whole $100,000 will be due as a single "balloon" payment. Or maybe principal payments will begin to be made monthly - and that particular loan MAY require that the $100,000 be amortized over 20 years, starting after 10 years, so that the loan will be fully amortized after 30 years. We would have to actually READ the terms of the loan - as your friend should have done before signing it - to know what is required after 10 years.

Without having actually tried it, my guess is that Quicken can handle a

20-year amortization starting 10 years in the future if you carefully enter the appropriate present and future dates. If you post the actual terms of the loan, we can probably help you enter them into Quicken. (Well, I probably can't, but John Pollard or some of the others who have used Quicken's loan wizard probably can.)

Such loan terms are not unheard-of, but they don't fit the typical pattern. Of course, in today's climate, who knows what is typical anymore?

RC

How about 20% down, 80% mortgage, fixed for 15/20/30 years? ;)