Interest only mortgage

[HardDrive]

My wife had a number of friends who are physicians, and they all have financial advisors'. So I have to hear loads of BS that filters through from these people, and sometimes we get in arguments about it.

So here is latest. One of these jokers tolled a friend of ours to get an interest only mortgage. His theory being that the money that would go into paying down your principal would be better off in the market. He told them that 30 years down the road, they will have so much money that they will be able to buy a house with cash.

Call me old fashion, but doesn't this strike you as totally f*cking reckless? Aren't you making some enormous assumptions about the stock market beating the real estate market?

My goal has been the very opposite. To pay extra against the principal so that we own our home by the time we are 50. Regardless of what happens economically or with our health, we will at least own our home.

Am I just being a fuddy duddy? If someone can show it to me on paper I would be more than willing to change my mind.....

[Nathans_Dad]

Interest only mortgages are bad news IMHO.

They work pretty well as long as interest rates stay low and the current housing boom continues. The problem comes when interest rates rise and banks are no longer falling over each other to lend you money. Then the bank decides to no longer offer that interest only mortgage and you suddenly have a massive increase in your mortgage payment which you may or may not be able to meet.

Now there is validity to the idea that you should put as little money into your mortgage as possible. Here is the reasoning:

Real estate appreciation is independent of how much equity you have in the house. The price will go up or down based on the market, you don't get any more appreciation on a house you have completely paid off vs. one that is newly mortgaged. So that money is essentially dead money.

Therefore you put as little equity into the house as possible and put the extra into investment vehicles that will appreciate.

Of course some people are debt averse and for them it is worth it to just pay off the debt for peace of mind.

[Dantilla]

Why not just rent?

The mortgage foreclosure rate has gone way up lately. Mortgages with interest only for the first few years were being pushed hard a few years ago. Now, people who were thrilled that they could get into a house that they really couldn't afford are finding out they're in over their heads.

I have a 15 year loan on my house. As soon as it's paid off, it's like getting a monthly raise equal to my mortgage payment. I have other investments, mostly in real estate. Building equity in my properties is what allows me to borrow more, and aquire more property.

[vash]

right intrest only is a sucker bet. i think the popularity went up when people saw the value of the home rocketing up. especially in the bay area. i have a few friends that fell for the hype. one guy has his effen head stuck in the sand. he says he is safe because he can always sell his house. i asked him where he would move to, and if he can afford the new property tax. his dumb look was priceless. i hope he refied, but i dont ask.

i think it just got more people into homes they really couldnt afford. reading the first post: do these people think that an intrest only loan goes on for 30 years? dont they expire at the five or 10 year mark?

[TerryBPP]

I did a interest only but my intention are to sell the house within 5 years, before the rates change. It is like renting expect at the end of three years you collect a $100k check.

[RANDY P]

Rates are low enough where it's better to borrow the money (take out a larger mortgage) and invest your cash elsewhere - I/O loans allow borrowers to take advantage of this further - but once again, depends on your risk tolerance.

Another weird way of looking at it is the I/O loan works good for those who intend to sell within 36 MOS - minimal investment.

It's a new game these days - everyone wants to use the equity to get rich...

rjp

rjp

[pbs911]

Another weird way of looking at it is the I/O loan works good for those who intend to sell within 36 MOS - minimal investment.

The "good" assumes the value of the house remains the same or increases. If it remains the same then you can get out of the mortage but still have to eat the realtor charges.. So you lose 6% of the value of hte home. If the house increase in value at 6% then you break even since you can pay off the mortage and the realtor. If the house value drops you lose since you can no longer sell the home for what it would cost to pay off the mortgage. The latter is what is beginning to take place.

Another issue is the IO loans have an option of minimal payment on the interest. Many times this does not even include the total interest accumulated. So each month your mortage increases. Great if the house value goes up since you had a minimal investment for the 36 months. With rising interest rates and the homes sitting for months and still not selling you can no longer plan on being able to sell at even todays'.

[Porsche-O-Phile]

Anything being promoted so heavily by banks and realtors can't POSSIBLY be in your best interest. It's in theirs.

Please. A little common sense here.

[Superman]

I guess I'm going against the grain here, but this seems like a no-brainer.

Every dollar that you pay toward principle you will get back exactly one dollar. So today you invest that dollar and in thirty years you get......one dollar back.

If you make money when you sell a house, the money you made is not equity you bought. that's money you had to begin with. The money you made is the appreciation. I am a fan of paying as small a mortgage payment as you can get away with. Because at the end of the day, your only profit is the appreciation. And the mortgage interest tax deduction.

One guy buys a 100,000 home and pays 1000 per month, part of which is equity. Thirty years later it is paid off, and he sells it for 200,000. He makes 100,000 profit.

Another guy gets two interest-only mortgages on two 100,000 properties, and pays 500 each for a monthly mortgage total of 1000. Thirty years later he sells them for 200,000 each. His profit is 200,000, with the same cash outlay as the other guy.

[MikeSid]

Supe, your examples don't pencil out.

In each scenario, the mortgage payments total $360,000.00
But in the first scenario, the owner OWNS the home when he sells.
In the second scenario, the owner doesn't own either property and has to buy them before he can resell.

In the first scenario, the owner paid $360K and resold for $200K making a net loss of $160K

In the second scenario, the owner paid $360K, then had to buy the homes for the original $100K each for a total outlay of $560K. He then resold for $400K, a net loss of....you guessed it... $160K.

[JeremyD]

I plan on selling my home in exactly one year - interest only works for me.

Interest only - also works to leverage your buying power. In a fast appreciating market - there is a risk, (as in all financial transactions) but the reward can be pretty good too.

If the market is appreciating at a 30% clip - who gives a f^$# if you are adding $100 to your principal per month.

[Rick Lee]

I have an IO 5/1 ARM and plan to sell in one year too. I put 20% down and my house has appreciated about $100k in the year I've owned it. Even if the market tanks, I have four more years until my ARM adjusts. How can I lose?

[Nathans_Dad]

If you plan to sell the house before the IO portion runs out then I guess it would make sense, unless the value of your house falls. The ones who most people are concerned about are the people buying houses that are twice what they can afford and do an IO loan to make it. They are assuming that their incomes will increase or that the house will appreciate such that they can re-finance with the added equity into an attractive regular mortgage.

All of that is well and good, as long as you assume the housing market continues to increase and that you will be able to qualify for that re-finance in 5 years....hence the problem.

But Supe is right in saying that it makes sense to put as little equity in your house as possible. I explained why in my first post on this thread.

[ken_xman]

Inflation boys.
Its like buying your parents house now, for what they paid 30 years ago.
A $350k house 30 years ago was $30k.
I would rather pay the $30k WITH TODAYS DOLLARS.
Same concept.

[bigrubberjeep]

Nothing wrong with Interest Only loans in my opinions, I have one and I sell them too. They are no riskier then your standard 2/1 arm, 3/1 arm or 5/1 arm, all they do is give you an "option" to not pay principle when either your short on cash or you just feel you will sell soon and cash out on any potential equity.

Now if you "choose" to pay just the interest and nothing towars your principle, that's the risk you take. Never the less, you still "KEPT" the money that would normally have gone to priciple, so either you pay it down or you keep the cash in your pocket, the diference is, you have the cash flow today, after all, who can guarantee you will be able to enjoy that cash tomorrow vs. today?

Now if your a conservative investor and still want the best of both worlds, take the loan I took. a 30 year fixed loan with an Interest Only option for the first 5 years, so even if I pay no principle in the first 5 years, my rate is still locked and I will have a 25 year amorotizing loan after these first 5 years of I/O

[Hugh R]

I went from 25 years left on my loan to a fifteen. They way I figure it, at $3,000/month payments, that's $360,000 that I won't be paying someone else (principal, interest whatever). Its still 360K that won't be leaving my wallet.

[Rick Lee]

If you make one extra P&I payment per year (divide your P&I by 12 and add that much to each monthly payment), you'll pay off your loan seven yrs. early. That's 84 payments you'll save.

[vash]

call me old fashioned... but isnt the entire goal of all this is to not have a house payment when you retire? if someone goes and hops from I/O loan to loan, what happens when you quit working? move to idaho?

[MikeSid]

I agree vash.

The goal is to have others pay YOU interest. You can only achieve that when you are debt free.

[Nathans_Dad]

Vash, the idea is not necessarily to not have a mortgage payment when you retire. For example, if you pay off your $300,000 house over the 30 years then you have....$300,000 (ok, I'll give you $500,000 for appreciation).

I, on the other hand, invest that $300,000 over the 30 years and will have much more money than you in the end...enough to buy my house outright with cash or continue to make my mortgage payments.