Home Interest only mortgage??

[somethingshiny]

What EXACTLY is it?? I understand you only pay interest for the first "x" years, but besides lowering your house payments during that time, what does it do? Who is it beneficial to? If it''s a way to get a nicer house right off the bat, I can see it coming back to bite the butt. Am I off base?

Help and TIA!

 

[Hera]

It's not a good idea. Basically, you build no equity as you make payments on just the interest in the first years. These payments are lower in the beginning and then they increase after that period, but you have built no equity in the house. This makes it very difficult if not impossible to refinance in case you can't afford the larger payments down the road. I actually thought they got rid of these type of loans, but I guess they're are still there. I believe they have adjustable rates that are associated with them as well (not good considering the housing mess). One of the only reasons why an interest only loan would be okay is if your husband is in med school and then you can make the bigger payments after he become a doctor. It does let you qualify for more house than you really can afford, and I think it's very risky.

 

[VRBeauty]

I had an interest only loan when I first bought my house many years ago. In my case, it was a fixed-rate loan. The monthly payments either stayed the same over the life of the loan, or increased slighty after the initial five-year period (I don't recall). However, in the first five years or so I was not building equity and the principle was actually increasing so that at the end of five years, I actually owed "the bank" more than I did when I first took out the loan. The arrangement allowed me to buy a house very early in my career, and one that was a bit better than I would otherwise have been able to afford. It worked for me because 1) I was certain that my income would be increasing steadily for the next few years, 2) the house was under-valued relative to the rest of the market, which potentially offset the increasing priciple/lack of equity, and 3) I bought when interest rates were ridiculously high, (would you believe over 14%

???) and it was very reasonable to assume that I'd be able to refinance to lower rate loan within five years. It was admittedly bit of a gamble nonetheless, and it's a loan structure that could easily be abused.

Heranderson is absolutely correct in her assessment that the virtual guarantee of an increasing salary is the most valid scenario for considering this type of loan... and that it's risky because it allows you to purchase more house than you can afford.

 

[Dancing Fire]

Date: 8/15/2008 12:32:41 AM
Author:somethingshiny
What EXACTLY is it?? I understand you only pay interest for the first 'x' years, but besides lowering your house payments during that time, what does it do? Who is it beneficial to? If it's a way to get a nicer house right off the bat, I can see it coming back to bite the butt. Am I off base?

Help and TIA!

do a search on IO loans.

i'am the expert on this topic. 3 yrs ago... i said within the next few yrs we will see the biggest mortgage default in history and here we are a few yrs later.guess what ??

 

[Pandora II]

I have one of these.

We've bought a new house which we have a repayment mortgage on - so every month we pay a bit of the mortgage and in 25 years it's all ours.

In order to buy the new house, we remortgaged the existing property onto a 25 year variable rate interest-only mortgage at 80% of it's value (valued after the credit crunch had hit so value is actual not last years) and used the equity to put a 20% deposit down on the new house.

Since the existing property is in central London and in a very sought after, up and coming area, we would be very unlikely to be without tenants. The rental income will easily cover the mortgage and any upkeep on the place. Our financial advisor told us that if we had a repayment mortgage we would have to pay tax on the income from the rental, but with an interest only mortgage we don't have to pay any tax, so it made sense in many ways.

Since we just pay the interest every month, in 25 years time, we will have to find $500k to buy the property from the bank. However, considering that the value of the property has already doubled since we bought it 4 years ago, I'm not very worried. Central London is not somewhere that prices drop and there is far more demand than property available. So we will either buy it outright or sell it for a hefty profit when the time comes.

I don't recommend taking out an interest only mortgage unless you are doing it as a business proposition like we are. I would never have an interest only mortgage on my main property, or on a property that had distinct potential to end up in negative equity.

The worst thing to do of all is to take out a 100% interest only mortgage. With an 80% you do have a cushion against negative equity.

 

[Italiahaircolor]

If you can afford to avoid an IO loan, I would suggest it. Yes, you''ll have lower payments (not by much tho) and you''ll never touch the principal of your house...meaning you''ll never really be paying it off...

You might as well continue to just rent...

 

[moremoremore]

an interest only loan is not necessarily a negative amortization loan (where you end up deferring interest and it is added to principal so at the end of the interest only period, you owe more)...it can be just all of the interest....Unless you're planning on winning lotto in the next few years or can COUNT on a salary change, and found THE house now- so that why not just pay interest now, I woudn't do it....On a standard mortgage, you really pay very little to principal in any event, but this makes it worse!

 

[littlelysser]

Although I generally agree that IO mortgages are not a great idea, I disagree with the statement that you can''t build equity. I have a friend who purchased a condo two years ago for about 680k on an IO mortgage. Her place is on the market TWO years later for 975k.

She got a great deal on the condo in the first place (new construction, she was one of the first ones in) and the 975k price is less expensive than the other condos for sale in the building.

Assuming she gets something even close to her asking price...she''ll make at least 200k. Which is some pretty nice equity earned over two years.

 

[neatfreak]

In this economy it is generally a really really bad idea...you can end up upside down in your mortgage so easily.

 

[Beacon]

It is important to know that an IO is not necessarily a neg am loan. Those are two different products. Some loans have characteristics of both, so you need to know what you are buying.

I have an IO. I put it onto a refi we did 1.5 years ago. It''s IO for the first ten years, low interest rate, no neg am possible. It''s basically a 10 year fixed rate interest only loan, and the rate was low (I even negotiated rate with the bank) . I don''t think they make that flavor anymore!

I put the IO on because otherwise we were going to end up with a paid off mortgage. I don''t want a paid off mortgage. Have way too much equity in this house as it is. I did a cash out on this loan as well. So now my payments are all 100% tax deductible and the cash out proceeds are earning interest in their own account. Remember, when you have a regular mortgage, part of your payments are not tax deductible. Plus equity sitting in your home does little good.

It''s not something I would recommend for all people as at the end of the interest only period, your payment will go up A LOT. If you are very conservative or have poor saving habits, it''s probably a bad idea. However, if you know that you can handle that, it can work out for you.

 

[somethingshiny]

Thank you all for your advice and real-life scenarios.

This "option" was brought up to get THE house now, instead of a "starter" house. Our housing market is tough around here. Most of the homes have been for sale for over 6 months, so we don''t want to get into a "starter" house and then deal with trying to sell it for a year when it''s time to move up. It sounds like the only way to make it work is to invest the money that you''re "saving" into a high interest account and then use that money to make large principle payments. DH is a terrible saver so that''ll never work for us. Back to the drawing board....

 

[Hera]

Date: 8/15/2008 3:48:35 PM
Author: somethingshiny
Thank you all for your advice and real-life scenarios.

This ''option'' was brought up to get THE house now, instead of a ''starter'' house. Our housing market is tough around here. Most of the homes have been for sale for over 6 months, so we don''t want to get into a ''starter'' house and then deal with trying to sell it for a year when it''s time to move up. It sounds like the only way to make it work is to invest the money that you''re ''saving'' into a high interest account and then use that money to make large principle payments. DH is a terrible saver so that''ll never work for us. Back to the drawing board....

I think it''s okay to buy a starter house in a tough market as long as you''re willing to stay in it at least 5 years(and more possibly). You might want to consider waiting a year as home prices are still declining in some of these tough markets. That will allow you some time to save up even more and the possibility that more of THE homes will come down in price.

 

[Dancing Fire]

Date: 8/15/2008 1:18:07 PM
Author: Beacon
It is important to know that an IO is not necessarily a neg am loan. Those are two different products. Some loans have characteristics of both, so you need to know what you are buying.

I have an IO. I put it onto a refi we did 1.5 years ago. It''s IO for the first ten years, low interest rate, no neg am possible. It''s basically a 10 year fixed rate interest only loan, and the rate was low (I even negotiated rate with the bank) . I don''t think they make that flavor anymore!

I put the IO on because otherwise we were going to end up with a paid off mortgage. I don''t want a paid off mortgage. Have way too much equity in this house as it is. I did a cash out on this loan as well. So now my payments are all 100% tax deductible and the cash out proceeds are earning interest in their own account. Remember, when you have a regular mortgage, part of your payments are not tax deductible. Plus equity sitting in your home does little good.

It''s not something I would recommend for all people as at the end of the interest only period, your payment will go up A LOT. If you are very conservative or have poor saving habits, it''s probably a bad idea. However, if you know that you can handle that, it can work out for you.

but don''t forget the interest you paid to the bank. you will not come out ahead even after your deductible. on the avg for every dollar you paid in interest you''ll get 30 cents in return.

equity sitting in your home does little good??? oh yeah

.....go tell that to the people that are losing their homes right now.

we paid off our mortgage in 2004 and i could care less what my home is worth today.i know we loss about 120K in equity during this housing crisis,but it feel so good w/o a mortgage payment every month.

 

[Dancing Fire]

Date: 8/15/2008 9:16:33 AM
Author: littlelysser
Although I generally agree that IO mortgages are not a great idea, I disagree with the statement that you can''t build equity. I have a friend who purchased a condo two years ago for about 680k on an IO mortgage. Her place is on the market TWO years later for 975k.

She got a great deal on the condo in the first place (new construction, she was one of the first ones in) and the 975k price is less expensive than the other condos for sale in the building.

Assuming she gets something even close to her asking price...she''ll make at least 200k. Which is some pretty nice equity earned over two years.

did she sell condo yet?

 

[moremoremore]

I think you''re talking about two different things, really...

There is building equity in terms of you paying down your principle....

Then there is building equity by virtue of sheer appreciation....

 

[Dancing Fire]

Date: 8/15/2008 7:41:11 PM
Author: moremoremore
I think you''re talking about two different things, really...

There is building equity in terms of you paying down your principle....

Then there is building equity by virtue of sheer appreciation....

MMM
maybe in your area, but we call it DEPRECIATION in our area for the pass 3 yrs.

 

[Beacon]

Date: 8/15/2008 7:17:38 PM
Author: Dancing Fire

Date: 8/15/2008 1:18:07 PM
Author: Beacon
It is important to know that an IO is not necessarily a neg am loan. Those are two different products. Some loans have characteristics of both, so you need to know what you are buying.

I have an IO. I put it onto a refi we did 1.5 years ago. It''s IO for the first ten years, low interest rate, no neg am possible. It''s basically a 10 year fixed rate interest only loan, and the rate was low (I even negotiated rate with the bank) . I don''t think they make that flavor anymore!

I put the IO on because otherwise we were going to end up with a paid off mortgage. I don''t want a paid off mortgage. Have way too much equity in this house as it is. I did a cash out on this loan as well. So now my payments are all 100% tax deductible and the cash out proceeds are earning interest in their own account. Remember, when you have a regular mortgage, part of your payments are not tax deductible. Plus equity sitting in your home does little good.

It''s not something I would recommend for all people as at the end of the interest only period, your payment will go up A LOT. If you are very conservative or have poor saving habits, it''s probably a bad idea. However, if you know that you can handle that, it can work out for you.

but don''t forget the interest you paid to the bank. you will not come out ahead even after your deductible. on the avg for every dollar you paid in interest you''ll get 30 cents in return.

equity sitting in your home does little good??? oh yeah

.....go tell that to the people that are losing their homes right now.

we paid off our mortgage in 2004 and i could care less what my home is worth today.i know we loss about 120K in equity during this housing crisis,but it feel so good w/o a mortgage payment every month.

I get what you are saying DF, the way we do it is not for everyone. However, equity sitting in a house has no chance for compounded annual returns. The value of your home has no relationship to the equity you have in it. If you own it free and clear, you have a lot of capital tied up in a situation that has no compounded rate of return. So we try and limit this. We are in a high tax bracket and high tax state, so the 30% marginal tax rate is not available to us. That much said, the govt takes away parts of our mortgage deduction, so we don''t get the full advantage. And even considering that we do this, our mortgage is a small cost for us so it''s not a big deal. It all does add up though, if you run out the numbers over long periods of time, you see that paying mortgage interest (a non compounded cost) and while simultaneously earning a compounded rate of return outside the home, creates much more wealth. But it is a discipline thing, you cannot spend the money wastefully, you have to invest.

For the OP, they are definitely wiser not to stretch themselves too thin. Also, for the OP, I would try and buy your upgrade house, rather than the starter home, by negotiating hard on the REO property that is all around. Sounds like your area is hard hit so you might make a better deal than you think. I would go out and offer the price you can afford and see if you get a bank to nibble. Good luck!

 

[Dancing Fire]

Date: 8/16/2008 3:18:45 AM
Author: Beacon

Date: 8/15/2008 7:17:38 PM
Author: Dancing Fire

Date: 8/15/2008 1:18:07 PM
Author: Beacon
It is important to know that an IO is not necessarily a neg am loan. Those are two different products. Some loans have characteristics of both, so you need to know what you are buying.

I have an IO. I put it onto a refi we did 1.5 years ago. It''s IO for the first ten years, low interest rate, no neg am possible. It''s basically a 10 year fixed rate interest only loan, and the rate was low (I even negotiated rate with the bank) . I don''t think they make that flavor anymore!

I put the IO on because otherwise we were going to end up with a paid off mortgage. I don''t want a paid off mortgage. Have way too much equity in this house as it is. I did a cash out on this loan as well. So now my payments are all 100% tax deductible and the cash out proceeds are earning interest in their own account. Remember, when you have a regular mortgage, part of your payments are not tax deductible. Plus equity sitting in your home does little good.

It''s not something I would recommend for all people as at the end of the interest only period, your payment will go up A LOT. If you are very conservative or have poor saving habits, it''s probably a bad idea. However, if you know that you can handle that, it can work out for you.

but don''t forget the interest you paid to the bank. you will not come out ahead even after your deductible. on the avg for every dollar you paid in interest you''ll get 30 cents in return.

equity sitting in your home does little good??? oh yeah

.....go tell that to the people that are losing their homes right now.

we paid off our mortgage in 2004 and i could care less what my home is worth today.i know we loss about 120K in equity during this housing crisis,but it feel so good w/o a mortgage payment every month.

I get what you are saying DF, the way we do it is not for everyone. However, equity sitting in a house has no chance for compounded annual returns. The value of your home has no relationship to the equity you have in it. If you own it free and clear, you have a lot of capital tied up in a situation that has no compounded rate of return. So we try and limit this. We are in a high tax bracket and high tax state, so the 30% marginal tax rate is not available to us. That much said, the govt takes away parts of our mortgage deduction, so we don''t get the full advantage. And even considering that we do this, our mortgage is a small cost for us so it''s not a big deal. It all does add up though, if you run out the numbers over long periods of time, you see that paying mortgage interest (a non compounded cost) and while simultaneously earning a compounded rate of return outside the home, creates much more wealth. But it is a discipline thing, you cannot spend the money wastefully, you have to invest.

okay Beacon
then give a tip on where to invest my equity money? i need an investment that covers the mortgage interest and still make a profit.

 

[VegasAngel]

Date: 8/15/2008 4:02:43 AM
Author: Dancing Fire

Date: 8/15/2008 12:32:41 AM
Author:somethingshiny
What EXACTLY is it?? I understand you only pay interest for the first ''x'' years, but besides lowering your house payments during that time, what does it do? Who is it beneficial to? If it''s a way to get a nicer house right off the bat, I can see it coming back to bite the butt. Am I off base?

Help and TIA!

do a search on IO loans.

i''am the expert on this topic. 3 yrs ago... i said within the next few yrs we will see the biggest mortgage default in history and here we are a few yrs later.guess what ??

You arent the only one. Hubby & I have been waiting for this since the housing rush started. We knew exactly what was going to happen. I remember watching a woman on a local channel talk about how great it was that she could own this huge $950,000 house on a golf course all thanks to an interest only loan. You should have heard her bragging about it, at first we thought it was a joke.

Sadly, we have too many friends who fell into the trap-A lot of them realtors. The housing market in Las Vegas is terrible. Well, bank owned homes are selling like hotcakes the others are priced to when the market was hot. People rather lose their home than lower the price.

 

[littlelysser]

Date: 8/15/2008 7:20:08 PM
Author: Dancing Fire

Date: 8/15/2008 9:16:33 AM

Author: littlelysser

Although I generally agree that IO mortgages are not a great idea, I disagree with the statement that you can't build equity. I have a friend who purchased a condo two years ago for about 680k on an IO mortgage. Her place is on the market TWO years later for 975k.



She got a great deal on the condo in the first place (new construction, she was one of the first ones in) and the 975k price is less expensive than the other condos for sale in the building.


Assuming she gets something even close to her asking price...she'll make at least 200k. Which is some pretty nice equity earned over two years.

did she sell condo yet?

Considering that it has been on the market for about a week, no she has not.

However, the other condos in the building are currently for sale for over a million dollars, and one similar to hers in square footage and finish sold a few weeks back for 1.1 million.

ETA - I understand that there is some pretty major depreciation going on in a number of cities...she lives in a mid-sized midwestern city. There was never much inflation going on there - and thus, no depreciation in home values.

I realize that her situation is unique. As I said, she was the first person to sign on with the building. Buyers that came a few months later paid several hundred thousand more for a similar condo.

ETA Again - My original post was a bit confusing. She purchased the condo two years ago. It has been on the market for a week.

 

[Miranda]

Date: 8/15/2008 7:41:11 PM
Author: moremoremore
I think you''re talking about two different things, really...

There is building equity in terms of you paying down your principle....

Then there is building equity by virtue of sheer appreciation....

Ditto.

IO loans can work to your benefit depending on your area, what you pay for the home, etc. They can be a bit of a gamble. For some people they are a great thing, for some they are a terrible idea. If you want to buy more home for less money and you are in an area that will appreciate, though I''m not sure how anyone can be sure of that in this market, they work. Another thought is that they are usually adjustable after a fixed period. After the initial fixed period the loan changes terms. For example, you have a fixed rate no neg am interest only loan for 5 years. At the end of the 5 years the loan changes into a 25 year (usually annual adjustable) loan with a fully amortized payment. That will be a HUGE jump in payment. It''s something that should be considered because you never know what will happen in 5 (or however many) years. Will your income really go up, etc.?

 

[VRBeauty]

Thanks everyone for the education on interest-only vs. negative amortization loans!

 

[somethingshiny]

Date: 8/16/2008 1:22:38 PM
Author: MINIMS
Thanks everyone for the education on interest-only vs. negative amortization loans!

ditto!!

 

[Dancing Fire]

Date: 8/16/2008 1:22:38 PM
Author: MINIMS
Thanks everyone for the education on interest-only vs. negative amortization loans!

don''t even think about it. these are the type of loans that has gotten so many buyers in trouble.

try to save 20% for a DP and do a 15 - 30 yr fix loan.

 

[VRBeauty]

Date: 8/16/2008 7:20:20 PM
Author: Dancing Fire

Date: 8/16/2008 1:22:38 PM
Author: MINIMS
Thanks everyone for the education on interest-only vs. negative amortization loans!

don''t even think about it. these are the type of loans that has gotten so many buyers in trouble.

try to save 20% for a DP and do a 15 - 30 yr fix loan.

Thank you for the input, but.... since my loan will be paid off in just a few months, I''ll pass.

 

[E B]

Date: 8/16/2008 7:20:20 PM
Author: Dancing Fire

Date: 8/16/2008 1:22:38 PM

Author: MINIMS

Thanks everyone for the education on interest-only vs. negative amortization loans!

don't even think about it. these are the type of loans that has gotten so many buyers in trouble.

try to save 20% for a DP and do a 15 - 30 yr fix loan.

This is what we're doing. We'd love to buy a home now, but we're waiting until we have a big chunk (at least 20 percent) saved and then we'll opt for fixed.

 

[Dancing Fire]

Date: 8/16/2008 7:22:57 PM
Author: MINIMS

Date: 8/16/2008 7:20:20 PM
Author: Dancing Fire

Date: 8/16/2008 1:22:38 PM
Author: MINIMS
Thanks everyone for the education on interest-only vs. negative amortization loans!

don''t even think about it. these are the type of loans that has gotten so many buyers in trouble.

try to save 20% for a DP and do a 15 - 30 yr fix loan.

Thank you for the input, but.... since my loan will be paid off in just a few months, I''ll pass.

Congrats !!

IMO.... a couple''s goal should be to pay off their mortgage as soon as they can.

 

[Dancing Fire]

Date: 8/16/2008 7:33:00 PM
Author: EBree

Date: 8/16/2008 7:20:20 PM
Author: Dancing Fire

Date: 8/16/2008 1:22:38 PM

Author: MINIMS

Thanks everyone for the education on interest-only vs. negative amortization loans!

don''t even think about it. these are the type of loans that has gotten so many buyers in trouble.

try to save 20% for a DP and do a 15 - 30 yr fix loan.

This is what we''re doing. We''d love to buy a home now, but we''re waiting until we have a big chunk (at least 20 percent) saved and then we''ll opt for fixed.

EBree
good for you

if every buyer puts 20% d/p we would not see this housing mess today.

 

[littlelysser]

FWIW, I don't think it is necessary to put down 20%. DH and I bought our house four and a half years ago. We both have good credit. We put down 10%.

We worked with a great mortgage broker and ended up getting a great fixed rate on the 80% and a line of credit for the second mortgage - which was the other 10%.

If you live in an area with a stable real estate market - a highly desirable neighborhood, whatever - there is a real benefit to buying as soon as you can afford to do so. I'm really glad that we have spent the last four and a half years building equity and enjoying some appreciation (not much, but a steady amount per year) rather than paying rent.

I do think it is important to have something to put down, though. We weren't going to buy unless we had enough for 10% and closing costs. The idea of mortgaging 100% of the cost of our house made us both uncomfortable. Several of my friends bought places with no money down and it has worked out for them, but that was a MUCH different economy...

 

[Dancing Fire]

Date: 8/16/2008 11:26:31 PM
Author: littlelysser
FWIW, I don''t think it is necessary to put down 20%. DH and I bought our house four and a half years ago. We both have good credit. We put down 10%.

We worked with a great mortgage broker and ended up getting a great fixed rate on the 80% and a line of credit for the second mortgage - which was the other 10%.

If you live in an area with a stable real estate market - a highly desirable neighborhood, whatever - there is a real benefit to buying as soon as you can afford to do so. I''m really glad that we have spent the last four and a half years building equity and enjoying some appreciation (not much, but a steady amount per year) rather than paying rent.

I do think it is important to have something to put down, though. We weren''t going to buy unless we had enough for 10% and closing costs. The idea of mortgaging 100% of the cost of our house made us both uncomfortable. Several of my friends bought places with no money down and it has worked out for them, but that was a MUCH different economy...

not in our area. the people that bought a home in our area 4.5 yrs ago are way under water today,even with a 10% dp some would still give up their home.