Is it worth while to do an Interest only...

[angel2003]

...loan when refinancing your home? 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.

[courtney02908]

He is offering you a negative amortization loan or in the mortgage world an option arm. It has 4 payment options 1 minimum payment2 Interest Only3 15 year payment 4 30 year paymentHere 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 aboveMinimum on 1.5%= 345.12interest only based on 7%=583.3315 year based on 7%=898.8330 year based on 7%=665.30as 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.