Easy..they get an interest only loan, pay nothing on the principle. It's like leasing a car, it allows you to live above your means your pocket book would normally allow you to.
There are advantages and disadvantages...depends on a lot of factors like the resale value, how long you intend on living there, etc.
Interest-only loans are very popular out here in SoCal. They're a safe bet in most cases, but a gamble nonetheless.
When you do one of these, you aren't planning to live in the area forever, and you're banking on the value of the home increasing at a substantial rate.
The advantages:
Let's assume a loan amount of $640,000. That'll get you a little 3-bedroom bungalow in Ventura County. Let's say that you qualify for an interest rate of 7.5% (aggregate on both parts of your loan). That's $48,000/year in interest, $4000/month.
Your payments are 100% tax deductible. So, if you spend $48,000/year on your mortgage, you end up saving about $16,000 in cash (real money) on your taxes.
Even if you only gain 2% in value per year (extremely low for this area, where growth has been 15-25% for several years now), you still come out ahead of the game. You generally need to keep a place at least 2 years, and then anything beyond that puts you into the serious earning range.
If you earn a conservative 8% per year, and stay in for 2 years, then your $640,000 home at the time of purchase is now worth $746,000. So, even after deducting the $96,000 you paid in interest, you're still $10,000 to the good...and the net effect is that you haven't paid a penny in housing costs for 2 years! Assuming your rent would've been $2500/month anyway, you've just saved yourself $60,000 in 2 years. Add that to the $16,000 you saved on your taxes, plus the $10,000 cash you have in your pocket and you've just made $86,000 in 2 years, meaning that your home paid *you* $3500/month.
Tim, check my numbers, but that looks about right.
