ok, rick i can see that arguement.

my personal goal is to be debt free, build a home on my land in new mexico, and travel my arse off.

but the interest only loan IMO just feeds the american mentality of instant gratification. most of my aquaintences that did go that route, they are not using the extra money and investing in anything. they just like the extra money in the pocket for buying trucks, boats, etc....i just think there are more people like my friends, and less like you. "danger will robinson!"

Vash, your own personal virtues ain't gonna stop the instant gratification thing in our culture. My folks are about to retire to their beach house and sell their main house, which could easily pay off the beach house. But they want to keep a mortgage payment for the tax write off and to free up the cash for other investments. Since they ain't struggling to pay the bills each month, I don't see how being house-richer and cash-poorer is a better idea for them.

There is no perfect solution. You have to evaluate your needs and wants.

I used to think a paid off property is a waste of equity. Well, most of my rental properties are paid off, and it's quite nice having low debt levels. I may be leaving 2-3% on the table, but I sleep really well at night.

The biggest problem with IO and option ARM is the fact most folks don't invest the dollars. The savings are spent on toys. There's a good reason IO was only 1-2% of mortgages given in 1999.

This is starting to remind me on dot.com days and "burn rate." :D

rick your parent seem to have a plan. i was mostly mentioning my buddies that enjoy the extra disposable income, so they can buy kevlar plated canoes. that is all.

This scenario assumes you have no present rent or mortgage payment which is a false assumption in most cases.

It also assumes that the stock market will outperform real estate.

What if you purchase a house that you can easily afford on a 20 year fixed note, and invest while you pay off your house? Then when your house is paid off, you have equity, plus the house payment money to invest as well. IO loans are simply borrowing money to invest, nothing more. Would you go to the bank and take out a loan, then turn around and put it in a mutual fund? I suppose some would, but if the market goes south (9/11 anyone?) you're screwed. Being debt free gives you total control of your money and the least liability.

Read "The Millionaire Next Door", people that have true wealth didn't get there thanks to borrowing. It's all about living below your means, making the sacrifice today for the big payoff years down the road. I'm sure there's people making money buying big houses with IO loans, then flipping them after a few years, but eventually when the market slows (and it will), it's going to be a recipe for big debt. What happens when you make IO payments as the principal grows, but your house appreciation slows, stops, or goes backwards? The real estate market in some parts of the country is due for an adjustment, and when it comes there's a lot of people that will get burned.

or say tom buys with a conventional loan he can afford a 200,000 house. joe buys with an interest only loan and can afford a $350,000 house. (joe and tom are twins and make the same money, etc...)

The both keep the house for 6 years and sell, January 1, 2012 after 72 payments.

Tom has a balance on his house of 183,473.77 after 72 payments so he has gained equity of $16,526.23 - Joe has no equity. Joe pays $1732.50 per month Tom pays 1231.43 per month. So, Tom is ahead right?

Well lets also assume that the houses have appreciated to during this time - let's choose 8% per year - that would mean Tom's house wuld be worth $317,374 and Joe's house would be worth $555,406 after the same period of time.

317,374 - 183,473 (principal - equity) = Joe has gained $133,901. What about that poor sap that's only been paying interest? His house is worth $555,406 and he still owes $350,000 - so he only has built his equity of $205,406.... hmm - he has paid a little more - ($501.72 x 72 payments = $36,077) but he would still be ahead.

Of course, this is the simplified version - but you get the idea.

another way to use it is to control multiple rental properties, or do multiple purchases on IO and neg am - the realized cash flow is tremendous esp. if you intend on selling the property at a gain in several years.


Artifically low payments + (what used to be) 20% appreciation in most markets = huge profits when sold in 24-36 mos. Relatively safe as well - all those loans require a certain amount of equity / down payment to qualify...

Note that I said "used to be" -- so don't cut me apart!

rjp

on and slightly OT but still relevant
 

I was told sometime ago from a reputable source that about 80% of all loans in written in 2004 in LA /Orange / Riverside and San Bernadino County CA are done as "stated income"

now that's scary - it's basically admission that the median cost is too high relative to the income...

I think we're in for a big crash soon. If you think the lenders are masterminds and an approval means you can afford it -

think again. Look at the state of HI - you have multiple families buying houses together and a screwed up landscape since housing is so much. No body is making enough to live well. Can't tax it since no one can afford it.


rjp

Not really, this is the time to refinance out of that laon and into a less risky loan such as a 30/20/10 year fixed with accelerated payment plan.

See, simple solution, you have to remember, your never locked in to anything, you can always walk away or refinance out of it if you feel it's getting too risky.

Some of you folks are doomsdayers (spell check), and think people will just stay stuck in these loans with interest only. YOU CAN PAY PRINCIPLE IF YOU DECIDE TOO on an interest olnly loan and YOU CAN REFINANCE OUT OF IT too.

This is what my borrowers are now doing, getting out of 2/1 and 3/1 arms in to 30 year fixed, not to mention most of them are now consolidating 1st and 2nd mortgages that are 2 years old when they got 100% financing at the time of purchace, now they have some equity and can get a much better loan - Normally these folks would not have afforded these homes, but due to creative financing, they are now living the american dream.

Re: on and slightly OT but still relevant
 

I don't beleive so, first of all stated income loans are usually for people with decent to good credit, this means they are borrowers that will most likely prevail and do what ever it takes to pay their mortgage payment (this is why it's called credit)

Your assumptions along with many doomsdayers are that us as people will just sit and let economy dictate what makes us and brakes us, I beleive different, I beleive people with good credit know how to maintain good credit, and when squeezed too tight they will know when to get out.

Now for those with not so good credit, the outcome will be nothing out of the norm, they either lied about their income and got in over their head or just wanted to jump into a house with the hopes of getting out of debt with some equity - I for one don't blame them, they did what they thought was a good risk, for some (actually many) it has paid off very well. For some that jumped in late, well.....we have yet to see.

That's amazing that you guys have the equity down there to do it. CA is great for loan officers, terrible for borrowers - you'll never pay it off. Face it, it's too much and thanks to creative fiancing you're back is against the wall. See my previous notes on stated - lots of borrowers simply cannot pay principle.

Usually, to show benefit you have to roll in all the credit cards, car payments, and cash out to make it work. Rarely does consolidation of a 1st and 2nd (and no one there ever, ever takes cashout right ;) ) make sense after costs are factored in.

Some borrowers see equity cashout as a source of annual income. Screwed up.

Recipe for failure.

rjp

Re: Re: on and slightly OT but still relevant
 

You and I both know that a FICO is absolutely NO indicator of financial savvy.

To "get out" of a liability like that either means pay more to pay it off, or sell the property. There is no two ways about it.

IO I sell well, but I shake my head when it's to a wage earner who just has to "HAVE THAT HOUSE' or whatever. It used to be that borrowers complained about the loan amounts being too low, these days banks are so aggressive that the borrowers are shrieking from the payments being too high, however the

"you can always go with a 30 year fixed next year to lower payments!!" is a hoax. The objection is NEVER the rate, it's the payment. with that said, raise the rate, consolidate the 1st and 2nd, roll in your 5% to pay yourself and on R/T it rarely works.

I just did $100K at 6% 30 year term. =$599.55 payment. I/O would be $500 / mo. To consolidate the two, and actually drop the payment (which is always the motivating factor these days) you'd have to pencil it out at a 4.39% rate to match that payment. Impossible if you're gonna try to pay it off, the market doesn't support it.

You have to pay off credit cards, crap and cash out for it to work, but once again, you're dealing with the fact the payments are going up - it's a losing preposition.

It's just tax deductible rent at this point.

Just my $.02

rjp

I agree with what your saying - However your point I think is based on someone that plans on owning their house outright someday. Fact is less then 5% of the population will ever pay it off. The rest of us who are not guaranteed tomorrow, borrow agains our house, wether it's to payoff debt (from living beyond your means beofre) or to buy some toys or make the house that you live in as nice or nicer then your neighbors.

Do you really beleive that after 30 years of paying mortgage on a house that you never fixed up, and now with over half a million dollars in equity. You think you wont borrow against it? Comon!

Now ask your self this, you rather borrow the money when your 60 or now? Now that your children live with you, now that your parent are still alive, now that your spouse is still alive?

Valid point, but that's also assuming that you're leveraged out on the house and your income is fixed - you simply can't afford any more. In CA, that's probably a reality vs. say, TX.

I don't consider CA the norm, I consider it the exception with regards to handling of Real Estate - it simply costs too much for housing down there, so with that said if that's what it takes to acquire and it means that much, then go for it.. Price to pay for CA sunshine I guess.

Where I'm at I'm less than 70% ltv in my place, and on 5.25% IO, and I earn enough to pay for most items straight out, and I'm pretty sure my monthly stroke is less than everyone's rent. It's an ideal. My money gets spent on other business ventures and messing with cars.

rjp

Perfect conclusion to this thread - Every persons goal and situtations are different.

The end result will only be as good or as bad as you want it to be, economics/market is just the vehicle you use to get there.

Some times the vehicle moves fast, sometimes it moves slow, even worst backwards. You can get off the ride whenever you wish.

Actually the stock market does outperform real estate on an average year by year basis but that really isn't the point. The point is that by paying off that house you do NOTHING to increase your gains in the real estate market. Look at it this way:

You buy house X and pay $100,000. You pay cash. House X appreciates to $200,000. You have made $100,000.

You buy house X and take out a mortgage. You sell it for 200,000. You have made $100,000. Well, perhaps a bit less due to the interest payments but you also get the tax writeoff so it's almost a wash.

See? Having money in that house does nothing to your return. So, many would say you might as well put that money into another investment that WILL make a return on it. Then you get the best of both worlds.


Puppy: I have read that book and it is an excellent one. Your suggestion about living beneath your means is pure gold. I mean it. My wife and I bought a house that was less than half of what we qualified for. We have been able to pay off all our credit card debt, have only one out of 3 cars not yet paid off, have put a substantial amount of money into investments and have a few thousand left over each month. It's actually incredibly freeing. Our main goal in our next move is to not be house poor.

Haha. Stated income is good for the masses. Haha. 2000 marked the new era of sophisticated financining. Haha.

anotherfockedborrower

We're slowly receding back to doing stated as true self - employed only.

Wall St is having fits with Wage earner (w2 employee) stated paper- they're punishing the lenders with demands for higher returns (higher note rates) thanks to default level which in turn, makes them harder to sell and limits the borrower in terms of absolute $$$ borrowed.

Some lenders are dropping wage earner stated all together and virtually everyone is raising minimum qualification requirements to get there across the board

- it's starting to puke NOW.

rjp