Never buy a house on an interest only loan. after we all wake up from this fairy tale...

[Dancing Fire]

real estate boom. this is what will happen....some john and jane doe buys a home on IO for 500k and the market bursts and goes down 20%. and the house now worth 400k and the bank wants them to come up with 140k since they will only finance 90% of the property value.if they sell the home,they will lose a 100k. by this time,they''re into negitive equity.when that time comes,you will know that DF isn''t such an idiot after all. like old Bush said, "read my lips." this will happen sooner than you think.

This is a true story: a friend of mine bought a house in 1991 and put only 5% down, then the market started to drift lower. by 1996 he offered me to take over the loan on his house with no money out of my pocket. i told him "you''re crazy, i can buy the same house across the street from you. for 20% less than what you owe the bank." so during those 5 years, all those money he paid on property tax & PMI ,went down the drain . you think his tax dedcutable on interest paid covered his loss?

#1-never buy on interest only loan
#2-never buy with little or no down.
#3-never buy because interest is low
#4-never buy because you think the market will go higher

BUY!!! WHEN YOU CAN AFFORD THE HOUSE

 

[Dancing Fire]

Mara
i don''t know you but,you live out there in silicon valley. doing the high-tech boom of 2000, how many of your friends told you... hey Mara, put all your money into this high tech stock,you''ll get rich quick. i have seen ups and downs in different kind of markets.every thing goes in cycles.

i witness the stock market bubble of 2000.POP (loss my A**)
i witness the bullion market when gold was trading at $850 an ounce. silver was $54 an oz .Jan 1980. POP
i witness the rare coin market bubble 1993.POP
i witness the collector car market bubble 1993.POP
i will witness the U.S.real estate bubble.POP ???
Japan real estate bubble 80''s POP
Hong Kong real estate bubble.the most expensive property in the world (per sq ft) POP

Mara, at least take this advise...when you get into a 15 year fixed loan make sure to pay it off in 15 years. don''t let a 15 year loan turn into a 20 or 25 year loan by refinancing every 3-4 yrs. stick to your goal. even when you refinance,say.. 3 years from now, try to pay it off in 12 years.

 

[abradabra]

Altough I generally agree with the main message of your post--interest only loans can create problems in a real estate bubble burst and people shouldn''t buy that which they can''t afford, I wouldn''t say that buying a home using an interest only loan is *always* a bad idea. It certainly is riskier than other mortgage setups, but that doesn''t make it bad--as long as the borrower understands what risks he or she is taking and are comfortable with that. There is a reason that there are so many mortgage options--it isn''t a one size fits all situation and part of being an adult is being responsible enough to figure it out for yourself.

A few things to consider--

* There are certainly some markets where a real estate bubble exists and is likely to burst/create problems. But that isn''t everywhere. It''s largely dependent on demographic and economic trends (how many new people move into the area to create demand for housing, the type of housing desired, job growth in a particular geographic area, etc.). I''m not looking at this from rose-colored glasses--there are always market corrections--upturns and downturns, etc.--but it''s not like everyone in America will simultaneously suffer a 20% reduction in the value of their house. If you smart about where and what you buy, you''ll reduce the chances of it happening to you. It''s not reasonable to avoid all risk--you have to find the level you, as an individual, are comfortable with.

* Just because you have an interest only loan, doesn''t mean you can''t build equity in your house. I would imagine the many people who carry a balance on their credit cards don''t make the minimum payment each month--they pay some higher number to try to bring down the balance. Unless you''ve somehow locked yourself in with a predatory lendor who penalizes early repayment of principal, you don''t just have to make your mortgage payment each month.

* And finally, to use your tech stock example--some people made a lot of money back in the 90''s investing in tech stocks and didn''t lose their shirts. As with any investment--there is always the potential for something to go wrong, but that doesn''t mean if you are careful, you can''t do well. Home buying is a similar concept. You could lose a lot of money, but that doesn''t mean you should rent for the rest of your life.

 

[lmurden]

My fiancé and I are holding off on buying a house because we are unsure about this housing market. Many people ask us "What are you waiting for?" and we respond that there is no rush. Also since my fiancé just got back from Iraq and he can get the VA Loan for $335,000 (which means no mortgage insurance and no down payment if we choose) and then we can take out a second loan to cover the additional cost of a house so that is another reason why we really don''t care about getting a house right this minute.

In the Washington, D.C. Area the housing market is out of control! Although, I do think it will always be a good housing market because of the Federal Government jobs and this is a highly educated area with high incomes so housing probably won''t go down that much. We are considering the LA County also but we are not sure about the market in California.

Anyway, I do agree with you about interest only loans not being as good as a 30-year fixed mortgage and that you shouldn’t buy if you can’t really afford a house and all the extras.

 

[fire&ice]

Date: 6/10/2005 2:19:54 AM
Author:Dancing Fire
real estate boom. this is what will happen....some john and jane doe buys a home on IO for 500k and the market bursts and goes down 20%. and the house now worth 400k and the bank wants them to come up with 140k since they will only finance 90% of the property value.if they sell the home,they will lose a 100k. by this time,they''re into negitive equity.when that time comes,you will know that DF isn''t such an idiot after all. like old Bush said, ''read my lips.'' this will happen sooner than you think.

This is a true story: a friend of mine bought a house in 1991 and put only 5% down, then the market started to drift lower. by 1996 he offered me to take over the loan on his house with no money out of my pocket. i told him ''you''re crazy, i can buy the same house across the street from you. for 20% less than what you owe the bank.'' so during those 5 years, all those money he paid on property tax & PMI ,went down the drain . you think his tax dedcutable on interest paid covered his loss?

#1-never buy on interest only loan
#2-never buy with little or no down.
#3-never buy because interest is low
#4-never buy because you think the market will go higher

BUY!!! WHEN YOU CAN AFFORD THE HOUSE

Except for buying a house when you can afford it (duh)....

Being in Real Estate development, this is NOT good advice. In fact, it''s irresponsible. PERIOD.

My statement comes from years of making money in real estate & debt free. I am not simply backing up what our current situation is.

One can loose money anywhere. In the long term, it is the exception when a house is not a good investment, especially in your lifestyle.

 

[aljdewey]

DF, what this post tells me is you refuse to think outside his own assumptions.

You assume that people want to buy a house and stay there forever--they don''t.

You assumes that the market is the same all over - it''s not. Some areas will hold their value due to demand.

You disregard sage information from real estate professionals who do this for a living.....none of them know anything, of course.

You just refuse to hear anything that falls outside the parameters of your narrow tunnel vision, hence the poor advice.

As mentioned in the previous thread on this, you are certainly entitled to your opinion, but there is just not *one* "right solution" for everyone.

 

[Dancing Fire]

Date: 6/10/2005 11:07:18 AM
Author: fire&ice

Date: 6/10/2005 2:19:54 AM
Author:Dancing Fire
real estate boom. this is what will happen....some john and jane doe buys a home on IO for 500k and the market bursts and goes down 20%. and the house now worth 400k and the bank wants them to come up with 140k since they will only finance 90% of the property value.if they sell the home,they will lose a 100k. by this time,they''re into negitive equity.when that time comes,you will know that DF isn''t such an idiot after all. like old Bush said, ''read my lips.'' this will happen sooner than you think.

This is a true story: a friend of mine bought a house in 1991 and put only 5% down, then the market started to drift lower. by 1996 he offered me to take over the loan on his house with no money out of my pocket. i told him ''you''re crazy, i can buy the same house across the street from you. for 20% less than what you owe the bank.'' so during those 5 years, all those money he paid on property tax & PMI ,went down the drain . you think his tax dedcutable on interest paid covered his loss?

#1-never buy on interest only loan
#2-never buy with little or no down.
#3-never buy because interest is low
#4-never buy because you think the market will go higher

BUY!!! WHEN YOU CAN AFFORD THE HOUSE

Except for buying a house when you can afford it (duh)....

Being in Real Estate development, this is NOT good advice. In fact, it''s irresponsible. PERIOD.

My statement comes from years of making money in real estate & debt free. I am not simply backing up what our current situation is.

One can loose money anywhere. In the long term, it is the exception when a house is not a good investment, especially in your lifestyle.

F&I
people who buys their FIRST house with 0 down are the ones who can''t afford it, PERIOD. you''re a real estate developer, and we are the ones buying from you. and that''s why you would never tell everyone that real estate is a bad investment. there was an article on Forbes a few days ago,that might shock you. in the pass 25 years,the S&P 500 out preformed the housing market by a long shot, even with this big boom .

 

[fire&ice]

Date: 6/10/2005 12:36:31 PM
Author: Dancing Fire

Date: 6/10/2005 11:07:18 AM
Author: fire&ice

Date: 6/10/2005 2:19:54 AM
Author:Dancing Fire
real estate boom. this is what will happen....some john and jane doe buys a home on IO for 500k and the market bursts and goes down 20%. and the house now worth 400k and the bank wants them to come up with 140k since they will only finance 90% of the property value.if they sell the home,they will lose a 100k. by this time,they''re into negitive equity.when that time comes,you will know that DF isn''t such an idiot after all. like old Bush said, ''read my lips.'' this will happen sooner than you think.

This is a true story: a friend of mine bought a house in 1991 and put only 5% down, then the market started to drift lower. by 1996 he offered me to take over the loan on his house with no money out of my pocket. i told him ''you''re crazy, i can buy the same house across the street from you. for 20% less than what you owe the bank.'' so during those 5 years, all those money he paid on property tax & PMI ,went down the drain . you think his tax dedcutable on interest paid covered his loss?

#1-never buy on interest only loan
#2-never buy with little or no down.
#3-never buy because interest is low
#4-never buy because you think the market will go higher

BUY!!! WHEN YOU CAN AFFORD THE HOUSE

Except for buying a house when you can afford it (duh)....

Being in Real Estate development, this is NOT good advice. In fact, it''s irresponsible. PERIOD.

My statement comes from years of making money in real estate & debt free. I am not simply backing up what our current situation is.

One can loose money anywhere. In the long term, it is the exception when a house is not a good investment, especially in your lifestyle.

F&I
people who buys their FIRST house with 0 down are the ones who can''t afford it, PERIOD. you''re a real estate developer, and we are the ones buying from you. and that''s why you would never tell everyone that real estate is a bad investment. there was an article on Forbes a few days ago,that might shock you. in the pass 25 years,the S&P 500 out preformed the housing market by a long shot, even with this big boom .

No, you are not buying from me. We are in COMMERCIAL real estate and I haven''t bought a house for resale because the market is so hot - hard to find a deal. I have NOTHING TO GAIN by challenging your OPINION. I have no hidden agenda - be it your insinuation of having some gain or justifying my reality.

And, people who buy their first house with 0 down, may have OTHER avenues for that money- ones that make their money work better for them. Do you understand the concept of "opportunity costs?" You aren''t doing anyone any community service. NEVER is a dangerous concept.

I''m all for people living within their means. But, your blanket statement about real estate is irresponisble advice.

 

[Mara]

wow F&I is a real estate developer? when did i miss that?

DF, I actually find your post to be somewhat offensive especially since you addressed it to me. you have two bits of information re: me and/or others and you think you have all the answers? One size fits all approach to the housing market? Get off the preacher's pulpit. Sure you may be right, but did you ever consider you may be wrong?

There is a right way and a wrong way to buy RE. We did our homework for m any months and talked to many people before we made our decision. We still stand by it as the smart one, you are talking to two educated people here and denouncing what we did as wrong and telling us we can't afford our house because we didn't do 20% down or we did an IO loan which is what YOU feel is right? Walking a fine line buddy.

If you have nothing better to post as your daily random question, at least don't be taking potshots at people who yes, as you noted, you don't know with relatively limited information. Posting articles to 'prove' your point, not impressive either. News can be spun.

And since you missed it last time, even if the market corrects at 20%, which I highly doubt in a very populated area like the BayArea...a drop would most likely be less extreme, we'd still be above water with appreciation, because of how we bought almost TWO YEARS AGO..it's not like we just bought last month and overpaid. Do you get that at all? As for refinancing, we may do it to lock in our rate for a few more years, but this is NOT going to be our long-term house, do you get THAT?

If not, don't bother responding, honestly your ignorance and narrow-minded view is the last thing I want to see this AM. I'm flattered you take so much interest in us, but I think we can manage our lives just fine thanks. I don't come to PS to get lectured as if you were a parent. Guess what, I already have an excellent set.

Oh and as an aside, my dad is currently taking RE classes at a local college just to further his own knowledge as he plans to purchase a few more properties, and he got a huge chuckle at the idea that all IO was bad and 20% was required.

 

[Kaleigh]

DF,
I find that offensive too.

 

[MichelleCarmen]

We bought our SECOND house with 0% down and used the money instead toward paying off a private loan we had on a piece of land that had a higher interest rate than our second mortgage now has. And, our second mortgage has an excellent LOW INTEREST loan

(bad, should have opted for the higher rate

)

Sorry, I think your intial advice is BS. We can make our current mortgage payments FIVE times over each month so WE CAN afford to pay our house payments - but we choose to allocate the funds toward our business as this is a better long-term money making project.

 

[Dancing Fire]

Date: 6/10/2005 1:31:00 PM
Author: Mara

DF, I actually find your post to be somewhat offensive especially since you addressed it to me. you have two bits of information re: me and/or others and you think you have all the answers? One size fits all approach to the housing market? Get off the preacher''s pulpit. Sure you may be right, but did you ever consider you may be wrong?

Mara
sorry if i offened you.YES,i been wrong many times.

 

[abradabra]

DF,

I don''t think the S&P 500 comparison is fair. Real Estate is a good investment in a different way than the stock market, for most people. An individual buying his own home derives value from living on their property, in addition to reaping the more financial benefits of appreciation. An abstract financial instrument has no function other than a right to potential money (in the case of something like stock, you aren''t even guaranteed a dividend, so you pretty much are only entitled to appreciation/buyout cash). So even if your home appreciates less quickly than the S&P 500, you may or may not be in a better position. When talking about home buying, it''s not only money that matters--you have quality of life issues, etc.

Furthermore, some housing markets will have outperformed the S&P 500 over the past 25 years, especially in large metropolitan areas or better yet, cities that did not use to be large, but are now. Some won''t have.

I don''t think absolutely everyone should necessarily buy a home, but I don''t understand why you are so set on only having people do it your way...

 

[Momoftwo]

I'm trying to figure out why a new thread was started after this was already being discussed on the other thread on Cost of Living. My father is also in real estate and he thinks the prices are getting out of hand, but doesn't think anyone who makes wise decisions will lost their shirt. There are a million ways to lose your shirt and the stock market and real estate markets happen to be just about the safest long term. Like was said on the other thread, you are terrified of risks. You also listing very narrow, risky investments like silver, rare coins, individual stocks, etc. Those are all risky especially SHORT TERM!!! That's why we invest in Mutual Funds, 401K's, etc that are spread out and not so narrow in scope. Also, almost every expert in real estate does not see a bubble burst, but a leveling off of prices due to incomes not keeping up with costs. Called Supply and demand. Oh, BTW, most people buy a home to live in, not because they expect it to go up dramatically.

 

[fire&ice]

CAN WE STOP THE MADDNESS???????

Anything can be a good or bad investment, as long as you consider all your options & aspects of the investment. Some are riskier than others. KNOWING the area of expertise is KEY - understanding the pieces and parts.

 

[Mara]

DF now you are just grasping at straws. Very short ones.

Momoftwo posted previously in that old thread that 30 year IO were a bad idea. I totally agree. But a shorter term IO....different subject, 5 years of paying 95% interest and 5% principal, not my cup of investment tea We can do much more with that 5% on our own.

Please just understand that whether or not you plan to be offensive, you are being very narrow-minded re: your own view. Newsflash, there are other ways to buy RE that are successful, but if you feel so strongly, write a book about it. We''ll see if it makes the bestseller list.

 

[movie zombie]

no offense to anyone and i''m not an expert although i have taken every re course required to become a realtor. one thing i did learn is that there are cycles in real estate just like with the stock market. and eventually every boom will bust.

i also was working in the savings and loan industry in the 80''s for which the taxpayers paid the tab and the bass brothers walked away with our $$$ after the dust settled from that bust. anyway, the s&l crisis was due to deregulation which allowed s&l''s to go into real estate and then real estate being EXTREMELY overvalued. started in texas and moved onto california from which it spread across the US. basically, everyone knows the game: seller wants to sell, buyer wants to buy, realtor wants the commission, bank wants to make the loan so appraiser...this is the crucial part...the appraiser knows all this and starts inflating the value of a property. this has a domino effect and before you know it, everything is very very very overvalued.

and its still going on. i have a friend who just bought property out of state and when the appraisal came in under the loan value, the realtor put pressure on the appraiser and it was upped. i also know that here in california when i sold my little box house that the buyer wanted to wrap his realtor costs into the loan and his realtor contacted the appraiser to make sure it would come in at that value.

everyone is in the game to make money.

now this is where times have changed. at one time, most people couldn''t afford to buy a home. and if you were lucky to do so, you lived and died in that home and passed it onto your kids who did the same. its not until after WWII with the GI bill and returning vets that we see homeownership extended to the masses. its now that we see the subdivisons being developed. at some time after that we see at least in california a shift in that the ''home'' is now viewed as an investment. people start buying homes and trading up. prices start to go up and it becomes an expectation that every home bought will end up making the seller $$$.

but then our economy starts to slow and we start to see homeowners taking their ''investment'' money out in the form of home equity loans to pay for boats, vacations, credit card debit, etc. because after all that $$ is just sitting there doing nothing and why not use it now?!

so these are the people that are going to be hurt when the real estate market adjusts itself and boom goes bust.

i personally would never buy a home with an IO loan. i still view my residence as my home, not an investment.

having said that, i also think there are people out there for whom IO loans are the only way they may get to own a home. you will note i did not say ''into the market'' because that phrase indicates speculation and anticipation of making $$$. for the person who understands the risks involved and wants to own a home, then it might be worth the risk.

in talking with friends i''ve noticed that most of them are not that savvy re real estate and don''t understand the business. most seem to be happy to just go to any mortgage broker and take what is offered. what i''ve learned is that it is my $$$ and no one is going to look after my $$$ better than i do. their job is to part me from my $$$ and it is my job to make sure my $$$ gets the most value.

i usually shop my own loans rather than go through a broker. this time we went through a mortgage broker who was really pushing the IO loan. we did our own research and found that the IO loan was going to cost us many many thousands of dollars more over the long run.... we plan to be here 10-15 years. the broker was visibly disappointed we didn''t go IO and went with the conventional 20% down to avoid PMI.

as in all things, it is true in real estate: let the buyer beware.

to those that have signed loan papers, congratulations. to those that are about to sign loan papers, do your homework and know that this bubble will bust. and to those very special people that have paid off their loans and actually own their home, i applaud you. because in reality, until we pay off the bank, we don''t own that house...the bank does.

peace, movie zombie

 

[Erin]

 

[Dancing Fire]

Movie Zombie.

i don't know guys maybe,i'm just too old fashion.

 

[Matata]

For others reading this thread who are as ignorant as I am about this type of financing (and I''m probably the only one who is dumb as a stump on this topic), you may want to read this. Maybe someone here can tell me if the info is accurate?

 

[Mara]

saying someone is 'old-fashioned' is a way of hiding behind only having narrow view of the world and being unwilling to admit there may be other ways to do something. it's rude to allude that someone is living in a fairy tale and does not know the risks or pros and cons of what they undertake or that one is being foolish in how they choose to spend their $$.

ESPECIALLY when they have told you numerous times that you are wrong to make those assumptions. you are are being purposefully ignorant of the fact that there are other options out there and that one way is not the right way for everyone.

that article matata posted is an excellent synopsis of what IO entails and what reasoning is for it. note that it speaks about intelligently doing research and avoiding deceptions. this is what we did, which is why we feel good about it. sure we know the risks, but any RE purchase is risky.

 

[aljdewey]

Date: 6/10/2005 7:24:46 PM
Author: Matata
For others reading this thread who are as ignorant as I am about this type of financing (and I''m probably the only one who is dumb as a stump on this topic), you may want to read this. Maybe someone here can tell me if the info is accurate?

Seems pretty spot-on to me.

 

[Dancing Fire]

Date: 6/10/2005 7:37:14 PM
Author: Mara


ESPECIALLY when they have told you numerous times that you are wrong to make those assumptions. you are are being purposefully ignorant of the fact that there are other options out there and that one way is not the right way for everyone.

correct me if i''m wrong, here''s what i''m assuming:

if i do a IO loan with 0% down and for the next 5 years, i only pay the interest every month, at the end of 5 years, i still own 0% of the property; am i correct? also during this period of 5 years, i will be paying the property tax for a house that i have 0% of ownership,since the bank is the 100% owner.

 

[Mara]

Date: 6/10/2005 11:09:52 PM
Author: Dancing Fire

Date: 6/10/2005 7:37:14 PM
Author: Mara





ESPECIALLY when they have told you numerous times that you are wrong to make those assumptions. you are are being purposefully ignorant of the fact that there are other options out there and that one way is not the right way for everyone.

correct me if i'm wrong, here's what i'm assuming:

if i do a IO loan with 0% down and for the next 5 years, i only pay the interest every month, at the end of 5 years, i still own 0% of the property; am i correct? also during this period of 5 years, i will be paying the property tax for a house that i have 0% of ownership,since the bank is the 100% owner.

Your IO loan scenario above is correct. That is assuming you plan to stay in your IO house for 5 years or more.

We don't. We have other plans. Such as leave within the 5 years, take the equity from this place, and put it down into the new house, adding whatever we have invested/saved in the meantime. Ideally this next place will be a longer-term residence.

This is where your scenario is wrong, aka where you assume that we are somehow getting taken advantage of by doing this or somehow not breaking even...pay attention now:

What we pay for our place now including all property taxes, HOA etc etc MINUS what we get back in a tax return at the end of the year is LESS than what Greg paid for a 1 bedroom 'luxury' condo back when he was single. For LESS than the rent of that 1 bedroom condo, we get a fabulous 1850 sq ft 3 bedroom townhouse that we adore.

Just so you understand what I am saying:

(Mortgage+Taxes+HOA+ETC)-(Property Taxes)=Less Than Rent on 1000 sq ft Apartment

How is that a losing situation? So far it hasn't been. Not in the least. Esp since it has appreciated about 25% in the last year and a half. If the market drops 20%..we are still in the black, still paying less than rent, and still living in a place we love.

Now let's address what you said about the scenario above. I cannot believe you still don't get this.

You said, 'If you do an IO loan, after 5 years you still own 0% of the property right'. Yes. BUT if you did a P+I loan..after that same 5 years, guess how much you would own? About 1-2%. Really impressive right? Not exactly. I'd much rather sell the house after 5 years, gain 20-25% in equity and then get a house we really want to pay P+I on.

To clarify:

IO+5 Years=0% Principal.
P+I+5 Years=1-2% Principal.

So again, for a short term residence, IO can be a smart way to go esp if you are not interested in the piddly 1-2% of principal, like the massive tax break (we were shocked at how much we got back last year), and like not renting.

Seriously DF it seems like you need to further educate yourself about IO and the options for doing it rather than assuming that your way is the best way. If I am the one explaining IO possibilities to you, that is.

Maybe you could sign up for a class.

 

[Dancing Fire]

Date: 6/11/2005 12:37:41 AM
Author: Mara

Date: 6/10/2005 11:09:52 PM
Author: Dancing Fire

Date: 6/10/2005 7:37:14 PM
Author: Mara






ESPECIALLY when they have told you numerous times that you are wrong to make those assumptions. you are are being purposefully ignorant of the fact that there are other options out there and that one way is not the right way for everyone.

correct me if i''m wrong, here''s what i''m assuming:

if i do a IO loan with 0% down and for the next 5 years, i only pay the interest every month, at the end of 5 years, i still own 0% of the property; am i correct? also during this period of 5 years, i will be paying the property tax for a house that i have 0% of ownership,since the bank is the 100% owner.

You said, ''If you do an IO loan, after 5 years you still own 0% of the property right''. Yes. BUT if you did a P+I loan..after that same 5 years, guess how much you would own? About 1-2%. Really impressive right? Not exactly. I''d much rather sell the house after 5 years, gain 20-25% in equity and then get a house we really want to pay P+I on.

that is speculating

So again, for a short term residence, IO can be a smart way to go esp if you are not interested in the piddly 1-2% of principal, like the massive tax break (we were shocked at how much we got back last year), and like not renting.

i don''t think you get back dollar for dollar on the interest you pay out.

Seriously DF it seems like you need to further educate yourself about IO and the options for doing it rather than assuming that your way is the best way. If I am the one explaining IO possibilities to you, that is.

Maybe you could sign up for a class.

where can i sign up for your class?

 

[Mara]

Date: 6/11/2005 2:27:30 AM
Author: Dancing Fire

Date: 6/11/2005 12:37:41 AM
Author: Mara

Date: 6/10/2005 11:09:52 PM
Author: Dancing Fire

Date: 6/10/2005 7:37:14 PM
Author: Mara
ESPECIALLY when they have told you numerous times that you are wrong to make those assumptions. you are are being purposefully ignorant of the fact that there are other options out there and that one way is not the right way for everyone.

correct me if i'm wrong, here's what i'm assuming:

if i do a IO loan with 0% down and for the next 5 years, i only pay the interest every month, at the end of 5 years, i still own 0% of the property; am i correct? also during this period of 5 years, i will be paying the property tax for a house that i have 0% of ownership,since the bank is the 100% owner.

You said, 'If you do an IO loan, after 5 years you still own 0% of the property right'. Yes. BUT if you did a P+I loan..after that same 5 years, guess how much you would own? About 1-2%. Really impressive right? Not exactly. I'd much rather sell the house after 5 years, gain 20-25% in equity and then get a house we really want to pay P+I on.

that is speculating

Not if we sold tomorrow it's not. Those are hard market values as of now.

So again, for a short term residence, IO can be a smart way to go esp if you are not interested in the piddly 1-2% of principal, like the massive tax break (we were shocked at how much we got back last year), and like not renting.

i don't think you get back dollar for dollar on the interest you pay out.

Of course you don't! Who said that you did? But look again at what I wrote re coming out on top re: renting vs IO mortgage, we are so in the black it's not even funny. We may not get dollar for dollar back but we are pretty darn close.

Seriously DF it seems like you need to further educate yourself about IO and the options for doing it rather than assuming that your way is the best way. If I am the one explaining IO possibilities to you, that is.

Maybe you could sign up for a class.

where can i sign up for your class?

Don't worry about it..I would flunk you.

 

[tanuki]

My husband sells mortgage insurance. Practically every person he sells to in the Atlanta market has an interest only product nowadays.
He sees people with a family income of $60,000 in $350,000 houses with hardly anything down. He comes home at night sometimes just shaking his head.

These are homes in areas an hour or more away from the city proper where there are still tons of undeveloped farms and empty fields.
These are not unique properties based on their location and are new homes that are not even particularly well built. What these people have is a house with no furniture in it (except for a big screen TV), no money left to maintain it, and nothing much left at the end of paying their bills. Some people at least have enough to buy insurance. Others tell him they can''t afford it.

These people are in a high risk situation.

There is a role for interest only loans for some people. People who move around a lot *as long as prices don''t fall*. People who have adequate but sporadic income. Who maybe make a big lump sum once or twice a year. The lower monthly payments help them thru the lean months as long as they are sensible about putting some money into principle when they actually get paid. People who would prefer to invest their money elsewhere and are able to tolerate the risk. People investing in a property in a location where there isn''t going to be an oversupply of buildable land and the location recommends it.

In the first five years of a loan you really don''t put all that much into principle anyway. I recall our house loan years ago was for $280,000. After years of making payments we had paid well into six figures of interest while only reducing the principle by maybe 10k. So an interest only product would have been about a wash for us if we moved and had to take out a new loan every few years.

Japan is a good example of what can happen in a real estate bubble. 15 years later and they still hadn''t recovered.

 

[Momoftwo]

Some might see there's a big difference between putting 0% down and barely being able to afford the house even with the IO and putting either 0 or whatever percent you want down and easily affording the payments but choosing to do something else with your money. I mean in 5 years on our current mortgage, we'll pay down a whopping $30k in principal which is not enough to even pay the closing costs when if we sold so it really doesn't matter how much you put down if the market isn't increasing in value. The tax break alone on the mortgage and real estate tax deductions makes it worth while to buy as long as you feel comfortable with the payments. Most of us are buying home to live in, not investments. Using IO and no money down loans is speculative if you are trying to flip homes to make a quick profit. There's all kinds of "what if's" in life. What if you lose your job and you can't make your mortgage payments even if you have 80% equity? We sold our second home at a $6k loss because the market was stagnant for the 7 years we were in the house '88-95'. You can't control that and we just used our savings to pay that out at settlement and buy our next home which ended up doubling in value in the following 8 years. Some of these new loan plans are the only way some people will ever be able to afford to buy a home. Also, as someone else said, back before WWII home ownership was at a much lower rate. Home ownership allows people to put themselves into nicer neighborhoods with better schools. I would never deny anyone that.

 

[MINE!!]

WOW.. Bravo MZ

 

[aljdewey]

Date: 6/11/2005 12:37:41 AM
Author: Mara

Date: 6/10/2005 11:09:52 PM
Author: Dancing Fire

if i do a IO loan with 0% down and for the next 5 years, i only pay the interest every month, at the end of 5 years, i still own 0% of the property; am i correct? also during this period of 5 years, i will be paying the property tax for a house that i have 0% of ownership,since the bank is the 100% owner.

You said, 'If you do an IO loan, after 5 years you still own 0% of the property right'. Yes. BUT if you did a P+I loan..after that same 5 years, guess how much you would own? About 1-2%. Really impressive right? Not exactly. I'd much rather sell the house after 5 years, gain 20-25% in equity and then get a house we really want to pay P+I on.

To clarify:

IO+5 Years=0% Principal.
P+I+5 Years=1-2% Principal.

A further note on this: As long as the bank owns ANY percent of the house, you do not have "ownership"....you have equity.

Ownership doesn't occur until the deed is transferred over to you entirely, and that doesn't happen until the house is 100% paid off. As such, it doesn't matter WHAT percentage of the principal you've paid down.....you still don't have any *ownership* until the principal is paid in full.

As for paying property taxes on a house you don't own, you do that in either scenario....P&I or I/O. However, you also gain a tax break on the house you don't own either.

The viability of different forms of loans really depends on the *individual* plans of the buyer. Historically, people didn't buy more than one house; that's why in those days, the 30-yr/20% down model was the only way to go.

I really think the primary danger in I/O loans applies to those people who are purchasing a home they plan to stay in and use the I/O as a means to buy more house than they could afford on their present salary. Those folks buy a house that they cannot actually afford to make full payments on today with the hope that their salary will increase enough during the I/O term to pay the higher payment when it comes due. It's those folks who are taking an enormous risk....which is fine if they are comfortable with that level of risk.

Date: 6/11/2005 12:37:41 AM
Author: Dancing Fire

Date: 6/10/2005 11:09:52 PM
Author: Mara

I'd much rather sell the house after 5 years, gain 20-25% in equity and then get a house we really want to pay P+I on.

that is speculating

In Mara's case, it's not speculating at this point...it's reality. The house *has* appreciated 25% in the 2 years she's been there. That's a fact.

But to the core point.....I say: Everything is speculating, for goodness sake! There are no guarantees in life. No one is guaranteed a job or a steady income with which to pay a 30-yr fixed loan.

No one has a guarantee that their savings are safe--even in a savings account! People think of savings accounts as low-return, no risk places to put their money. Think again.....tell that to all the folks in Rhode Island who lost their money when the entire banking system collapsed in the late 80s/early 90s.

There is risk in EVERYTHING. There is risk in leaving your house, in crossing the street, in driving a car. Some risk is manageable and acceptable and *reasonably* predictable.

Any kind of planning is speculative. That doesn't mean we shouldn't do it to the best of our ability with the best information we have at hand today.

Even if someone's "speculation" was wrong.....it's hard to imagine any scenario that will cost more than draining out money in rent. There's NO speculation involved there. If I have to pay out $19k a year in rent, I *know* that's money completely lost and I don't get ANY of it back.....and that's for a place I don't own either.

Rich said, "what happens if we buy the house and the market drops and we lose money?" My reply: Housing is like 401k funds. You don't "lose" money unless you cash out (in the case of a house, sell) when its value is down. (In the case of I/O loans, this means if the value is down at the end of the i/o period.) Unless the market drops more than the $38K we would have paid in rent over the two years, it's hard to see where we'd lose.