interest only home loans

[IndieQueen001]

Hello there!

I need help. We are about to take the plunge into home ownership, but I''m confused about the types of loans that are available. My question is about "interest only loans." Since the payment in not actually paying down the principle, could one possibly pay extra every month to apply only to the principle of the loan? Does that make any sense? Opinions on other loans would be greatly appreciated!!!


Amanda

 

[fortheloveofdiamonds]

Hey there,

Interest only loans are generally targeted to those who want/need a bigger loan than they can afford. The interest only loan reduces the payment to an amount that the buyer can afford. However, this loan is totally not recommended if you can afford the highter payment. You CAN apply additional to the principle of the loan. You CAN apply additional principle to the loan on any loan, however. In general, however, many people who choose the interest only loan do not have the means or choose not to apply principle to the loan. Also, in choosing this loan, you are not building any equity into the home.

There are SO many loan options its incredible. Those available to you depend on your credit score. Your mortgage lender will run a credit report and reveal what you are qualified for.

If I were you, i''d read "Mortgages for Dummies". It is very informative and useful for 1st time or 2nd time homebuyers. I wouldn''t make a decision until I had researched what were the best options for me.

Good Luck!

 

[littlelysser]

Amanda -

For what it is worth, in my opinion, interest only loans are just not a good idea. Indeed, you are not putting any equity into your home...and that might mean that you are looking at home that is just too much money. Essentially, you kind of just be paying rent to live in a large house. If property value were to go up, then you''d have some equity, but otherwise...eesh. Seems like a big gamble to me. Plus, there are a lot of unexpected costs that come with owning a home...I don''t think I''d be able to guarantee that I would be able to make additional payment(s) each year.

I''d recommend determining how much you can put down as a down payment and what you would be comfortable paying as a mortgage each month. Ideally, you''d be able to put down at least 20 %. There are a number of different options out there if you can put down less. I''d just be really wary of the interest only loans...

Get a mortgage broker that you trust, or a financial planner. That person should be able to help you!

 

[Mara]

if you don't plan to stay in your home for more than 5 years, then an IO could be a great option because the first 5 years you only pay about 5% a month of your payment to principal anyway with a P+I loan. so basically your first 5 years are like an IO anyway because so much of the payment is automatically applied to principal.

when we saw the comparisons for us we did IO because we were only planning to stay here for 5 years, and we can easily invest the Principal part (and more) into other areas that will reap better return for us. so the P+I vs IO difference for us was like $100-200 a month extra not a big deal, but after 5 years we'd have something like $10 extra equity in our home thanks to principal, when if we did other investments with that instead we could have more. also our house has appreciated $200k+ in 2 years so the extra measly $10k didn't really factor into our ability to get a bigger or better home. $10k now or $10k later doesn't really matter so much.

but if we were planning to stay here for 10 years we would have done P+I because starting the 6th year your payments automatically apply much more of the payment to principal.

so i wouldn't entirely rule them out based on one opinion or the other, you have to determine what makes most sense for you and your situation and go from there. i would agree not to do one if that is the only way to be able to 'get into' your house. then i'd recommend getting a smaller/more affordable house.

i did alot of research beforehand and we checked into the various options and ran comparison charts etc (on our own, not through anyone else) and THEN talked to other people once i felt armed with enough knowledge to not be 'swayed' personally. there is lots of great info out there online with reputable sites in terms of articles and also eloan.com had lots of great info and advice. good luck!!

 

[Momoftwo]

Hey Mara, where's DF? He certainly has his opinion on IO, as well as zero down. (edited)

IMO, they're really for people that can afford the full payment but choose to invest the difference elsewhere, not those that can't afford the payment unless it's IO. I don't think they're a bad idea, just be careful and don't use it to stretch too far.

 

[Mara]

Date: 3/5/2006 7:23:32 PM
Author: Momoftwo
Hey Mara, where''s DF? He certainly has his opinions on Interest Only.

haha i was just thinking that, i''m sure he will chime in soon!!

 

[sxn675]

LOL, I was totally expecting him to be here already!

 

[tanuki]

Another use for interest only loans are people who have an adequate but sporadic income (for example those who get paid in chunks of money from commissioned sales as opposed to a set monthly salary).

The interest only payment helps them get thru the drought times as long as they have the financial self discipline to make principal payments when the money actually comes in.

If you are taking an interest only loan as the only way that you can afford the house - unless it appreciates well in value you could actually end up owing more than the home is worth.

 

[IndieQueen001]

Thank you for the input everyone! More than likely, we won''t be in the home for more than 2 to 3 years. The asking price is about $30k less than the appraisal price, so we may try for quick turnaround. I was just trying to leave all options open (who knows... we may love the house and want to stay forever!

Of all of our house shopping, I hadn''t gotten the warm fuzzies like I did when I walked into this one.. I

this house!!!!

Amanda

 

[koko]

Be careful with I/O....if interest rates go up it could make a difference in your payments of hundreds a month depending on the amt. financed!! Good Luck.....

 

[IndieQueen001]

We haven''t decided what type of financing program we''re going with... IO was just a thought..
The mortgage rep said that there was a 2/1 arm... only problem that there was a prepayment penalty if you sell the house before the 2 years are up. It''s our first house.. so we''re nervous and excited all at the same time. We''re also learning a great deal.

 

[Waited2Long]

Keep in mind the costs of selling a home should you need to. The home has to appreciate by whatever the selling costs are if you want to just break even. Brokers will ask for 3% on both sides, so unless you get a fixed-cost broker or negotiate better terms, the home needs to go up 6% to stay out of the red on it. Of course, you can offset this cost by the savings vs. paying rent and on taxes.

 

[Momoftwo]

Don''t accept a loan with a prepayment penalty. There are too many options out there to have to accept those terms.

 

[Dancing Fire]

Date: 3/5/2006 7:36:43 PM
Author: sxn675
LOL, I was totally expecting him to be here already!

ha,ha ladies

i just got back from shopping.

DON"T DO IT !!!

i.o is for suckers ONLY.

b/c of i.o. loans is the reason why i'm predicting a housing market bubble to burst within the next couple of yrs, as more and more i.o loan period expires, many couples will not be able to make the higher payments and with interest rate creeping up fewer and fewer wil be able to afford the higher rates. Most of them are barely making it now on i.o. payment. I.O. loans is what caused this housing inflation in the past 7 yrs. Couples are just signing papers without thinking. Many of them will be homeless in a few years. There are already areas around the country where the housing market has started to decline. Within the next few years people on PS will realize that I'm not so dumb after all.

There's nothing good about home prices going up unless you sell your property and move to a cheaper state ie. from CA to a small town in the mid-west.

IQ001
Just go with a 15 yr fix conventional loan with 20% down if you can afford it. If not, go with a 30 yr fix loan and you will never be sorry. Interest rate is still low. Why would you want to mess around with any other type of loan?

The bottom line is...there is nothing good about an i.o. loan. NOTHING!

 

[Dancing Fire]

Date: 3/5/2006 7:20:51 PM
Author: Mara
if you don''t plan to stay in your home for more than 5 years, then an IO could be a great option because the first 5 years you only pay about 5% a month of your payment to principal anyway with a P+I loan. so basically your first 5 years are like an IO anyway because so much of the payment is automatically applied to principal.

True. But I would much rather start building equity sooner rather than later. In fact, I would make an extra payment every year or put more towards principal every month. Even a $100 extra every month would help a lot for a 30 yr loan.

 

[Mara]

Date: 3/5/2006 11:10:23 PM
Author: Dancing Fire

Date: 3/5/2006 7:20:51 PM
Author: Mara
if you don''t plan to stay in your home for more than 5 years, then an IO could be a great option because the first 5 years you only pay about 5% a month of your payment to principal anyway with a P+I loan. so basically your first 5 years are like an IO anyway because so much of the payment is automatically applied to principal.

True. But I would much rather start building equity sooner rather than later. In fact, I would make an extra payment every year or put more towards principal every month. Even a $100 extra every month would help a lot for a 30 yr loan.

Building equity is great, but we can still make extra payments whenever we want. We also have no prepayment penalty. The plan for us now is to pay off our 2nd within hopefully the next 2 years because it is our slightly higher interest rate. It will help us build equity but the way we prefer to look at it is that it''s a debt we want to pay off.

Personally I don''t think that any loan is out of the question as long as you know the pros and cons and are educated and willing to address the negatives should they arise. But the simple fact is that alot of homeowners just believe whatever their broker tells them and doesn''t bother to educate themselves and many people may have issues in the future. Time will tell.

 

[Waited2Long]

Date: 3/5/2006 11:10:23 PM
Author: Dancing Fire

Date: 3/5/2006 7:20:51 PM
Author: Mara
if you don't plan to stay in your home for more than 5 years, then an IO could be a great option because the first 5 years you only pay about 5% a month of your payment to principal anyway with a P+I loan. so basically your first 5 years are like an IO anyway because so much of the payment is automatically applied to principal.

True. But I would much rather start building equity sooner rather than later. In fact, I would make an extra payment every year or put more towards principal every month. Even a $100 extra every month would help a lot for a 30 yr loan.

It depends on the interest rate, but 5%? If I amortize a fixed 30 year loan at 5.25%, I calculate over 20% of the first payment goes toward the principal. The % goes up with each payment. At the end of 5 years each payment is about 27% principal, assuming no extra/additional payments.

 

[Mara]

Date: 3/5/2006 11:49:09 PM
Author: Waited2Long

Date: 3/5/2006 11:10:23 PM
Author: Dancing Fire

Date: 3/5/2006 7:20:51 PM
Author: Mara
if you don''t plan to stay in your home for more than 5 years, then an IO could be a great option because the first 5 years you only pay about 5% a month of your payment to principal anyway with a P+I loan. so basically your first 5 years are like an IO anyway because so much of the payment is automatically applied to principal.

True. But I would much rather start building equity sooner rather than later. In fact, I would make an extra payment every year or put more towards principal every month. Even a $100 extra every month would help a lot for a 30 yr loan.

It depends on the interest rate, but 5%? If I amortize a fixed 30 year loan at 5.25%, I calculate over 20% of the first payment goes toward the principal. The % goes up with each payment. At the end of 5 years each payment is about 27% principal, assuming no extra/additional payments.

hmm it may depend on the loan you are getting but we did a 5/1 and the interest vs principal was 95/5. it was really not worth it at all for us to do P+I.

possibly if you get a 30 year it is different?

 

[Dancing Fire]

Date: 3/5/2006 11:49:09 PM
Author: Waited2Long

Date: 3/5/2006 11:10:23 PM
Author: Dancing Fire

Date: 3/5/2006 7:20:51 PM
Author: Mara
if you don''t plan to stay in your home for more than 5 years, then an IO could be a great option because the first 5 years you only pay about 5% a month of your payment to principal anyway with a P+I loan. so basically your first 5 years are like an IO anyway because so much of the payment is automatically applied to principal.

True. But I would much rather start building equity sooner rather than later. In fact, I would make an extra payment every year or put more towards principal every month. Even a $100 extra every month would help a lot for a 30 yr loan.

It depends on the interest rate, but 5%? If I amortize a fixed 30 year loan at 5.25%, I calculate over 20% of the first payment goes toward the principal. The % goes up with each payment. At the end of 5 years each payment is about 27% principal, assuming no extra/additional payments.

i don''t know,but 20% sounds too high for a 30 yr loan

maybe for a 15 yr? i''m sure there''s a spreadsheet you can print out.

 

[Dancing Fire]

Date: 3/5/2006 9:59:53 PM
Author: IndieQueen001
Thank you for the input everyone! More than likely, we won''t be in the home for more than 2 to 3 years. The asking price is about $30k less than the appraisal price, so we may try for quick turnaround. I was just trying to leave all options open (who knows... we may love the house and want to stay forever!

Of all of our house shopping, I hadn''t gotten the warm fuzzies like I did when I walked into this one.. I

this house!!!!

Amanda

oh no!!! you been watching those late night real estate informercial

were the guy tells you he bought a house for $50k and the next week he sold it $200k and he made a $150k profit.

don''t even think about house flipping.

 

[Waited2Long]

Date: 3/6/2006 12:48:08 AM
Author: Dancing Fire

Date: 3/5/2006 11:49:09 PM
Author: Waited2Long

Date: 3/5/2006 11:10:23 PM
Author: Dancing Fire

Date: 3/5/2006 7:20:51 PM
Author: Mara
if you don't plan to stay in your home for more than 5 years, then an IO could be a great option because the first 5 years you only pay about 5% a month of your payment to principal anyway with a P+I loan. so basically your first 5 years are like an IO anyway because so much of the payment is automatically applied to principal.

True. But I would much rather start building equity sooner rather than later. In fact, I would make an extra payment every year or put more towards principal every month. Even a $100 extra every month would help a lot for a 30 yr loan.

It depends on the interest rate, but 5%? If I amortize a fixed 30 year loan at 5.25%, I calculate over 20% of the first payment goes toward the principal. The % goes up with each payment. At the end of 5 years each payment is about 27% principal, assuming no extra/additional payments.

i don't know,but 20% sounds too high for a 30 yr loan

maybe for a 15 yr? i'm sure there's a spreadsheet you can print out.

I sure hope it's right. I'm currently enrolled in finance as part of a MBA curriculum. Throw some numbers at me if you want to know how it varies by rate and time.

If the interest rate is 10%, the 1st payment is about 5% principal, 95% interest. But we haven't seen 10% since what, the 80s? I'm too young to have cared about the bond market back then.

 

[Dancing Fire]

Date: 3/6/2006 1:17:55 AM
Author: Waited2Long


I sure hope it's right. I'm currently enrolled in finance as part of a MBA curriculum. Throw some numbers at me if you want to know how it varies by rate and time.

If the interest rate is 10%, the 1st payment is about 5% principal, 95% interest. But we haven't seen 10% since what, the 80s? I'm too young to have cared about the bond market back then.

we bought our house in 1986.i think the interest rate was like 13.5%

for a 30 yr fix.

 

[fire&ice]

Date: 3/6/2006 1:55:45 AM
Author: Dancing Fire

Date: 3/6/2006 1:17:55 AM
Author: Waited2Long



I sure hope it''s right. I''m currently enrolled in finance as part of a MBA curriculum. Throw some numbers at me if you want to know how it varies by rate and time.

If the interest rate is 10%, the 1st payment is about 5% principal, 95% interest. But we haven''t seen 10% since what, the 80s? I''m too young to have cared about the bond market back then.

we bought our house in 1986.i think the interest rate was like 13.5%

for a 30 yr fix.

Yeah, ours was around 12%.

But, IO''s have their usefullness. If indeed you know what you are doing, IO''s make sense if you are going to sell in short time. A friend did this while renovating a house. The renovations were the equity - made no sense to pay more just to put pennies into principal. They made enough on this house to pay cash for their next home.

 

[february2003bride]

When we first bought our house (we built new) we signed a 5 year ARM loan because we weren''t sure if we''d totally love the neighborhood, neighbors, schools, etc. 1 year later the interest rates on a 30 year fixed were so low (5.5% I think?) that DH asked if this was THE house. Now, our house appreciated before Centex dug a hole in the ground, and since we closed 2 years ago yesterday, it''s appreciated almost $300K. But as DH puts, that''s just on paper. There could be a bubble bust, our house could sit on the market, anything could happen. So in Jan. 05 knowing that we loved our house, we ended up with the greastest neighbors and my DD loves the newly built elementary school, we changed our loan from a 5 year ARM to a 30 year fixed rate and we feel so much more secure! Our rate is insanely low and we''re happy knowing that if the market was to burst tomorrow, we wouldnt be homeless and our mortgage would stay the same.

That said, we live in a very desireable neighborhood in No. VA. that is still under construction. The home prices here are astronomical and people are buying homes smaller than ours (3300 sp. ft not including the basement) for $800K with options. It''s crazy! And their incomes can not be that much higher than ours (of course we could be wrong) so they must be in an IO loan to afford these homes. We can also tell who has hit the 2 year mark to avoid Capital Gains tax because almost to the day since they moved in, a handful of neighbors have/are selling their homes to get their equity now vs. might not possibly later. We contemplated that but then we thought, we wouldn''t leave VA, so where would be go? Home prices are too high!

We''ve been told many times that IO loans and the short term AMR loans are going to get totally shafted in a matter of months. I''m not a "doomsday" type of person but now, I can really see that happening!

 

[IndieQueen001]

Heh... DF... no infomercials over here

We''re just trying to keep all options open.. I''m just so tired of renting!
I''m waiting on a call from the mortgage officer to see exactly what they have to offer.

 

[Dancing Fire]

Date: 3/6/2006 9:23:47 AM
Author: february2003bride
When we first bought our house (we built new) we signed a 5 year ARM loan because we weren''t sure if we''d totally love the neighborhood, neighbors, schools, etc. 1 year later the interest rates on a 30 year fixed were so low (5.5% I think?) that DH asked if this was THE house. Now, our house appreciated before Centex dug a hole in the ground, and since we closed 2 years ago yesterday, it''s appreciated almost $300K. But as DH puts, that''s just on paper.

your DH is 100% correct. is not your money until you sell.

There could be a bubble bust, our house could sit on the market, anything could happen. So in Jan. 05 knowing that we loved our house, we ended up with the greastest neighbors and my DD loves the newly built elementary school, we changed our loan from a 5 year ARM to a 30 year fixed rate and we feel so much more secure! Our rate is insanely low and we''re happy knowing that if the market was to burst tomorrow, we wouldnt be homeless and our mortgage would stay the same.

we did the same. when we purchase our house in 86. started with ARM then we refi into a 15 yr fix 2 yrs later.


We''ve been told many times that IO loans and the short term AMR loans are going to get totally shafted in a matter of months. I''m not a ''doomsday'' type of person but now, I can really see that happening!

 

[Dancing Fire]

http://biz.yahoo.com/ap/060306/housing_slowdown.html?.v=2

 

[lmurden]

Date: 3/6/2006 8:34:24 PM
Author: Dancing Fire
http://biz.yahoo.com/ap/060306/housing_slowdown.html?.v=2

Great article, but we will see what happens in reality.