No. of Recommendations: 1

If I understand correctly, it is basically a matter of determining the best allocation of funds at any time. If your cost of funds -- the after-tax interest rate -- is less than your available return elsewhere, you are better off in the interest-only loan because you can increase your overall wealth more quickly by keeping the money out of the house.

YES!!! You GOT IT! You PASS, go to the HEAD of the CLASS!!!

Are the interest rates on interest-only loans the same as the rates on regular loans? It seems like they should be the same since the bank is getting the same return on funds outstanding either way.

Yes... however only as of recently have aggressive, conforming loan lenders offered an interest-only loan at no premium pricing to a regularly ammortized loan.

Why would they have charge MORE for an interest-only loan in the past? They figured that every months' payment in a regular loan, when you gave them BACK some money, their risks were being reduced because they were at least getting some of their money back.

Now many lenders are looking at another side of the equation as safer and more profitable possibilities;

The lenders aren't forced to spend as much marketing money selling more loans in order to make their interest because their borrowers theoretically won't be forced to repay, therefore won't refi away from the existing lender as quickly,

If I have this correct, for the bank an interest-only loan would basically be the same as if they bought a bond from the home-buyer...they receive a fixed rate each month (similar to the coupon) and a lump-sum payment at some date down the road.
Please let me know if I have any of this wrong. It is certainly an intriguing option.
Thanks again Dave!

You got it perfectly!
Mortgage Fool
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