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MarkV
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Interest only morgage?
02/13/03 07:11 AM
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Is any one up on the pluses and minuses of interest only mortgages? I had always looked at them as a way to let people buy what they could not afford. It particularly upset me seeing young couples buying houses with almost nothing down and thinking of the amount of debt they are setting themselves up with.
Anyway, I read an article that was saying for those who were not planning on keeping a property for more than five years there were advantages to the interest only loans. In this area the rates seem to be running about 4.5% with a balloon payment at five years. Any opinions out there?
MarkV
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AndyF
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Re: Interest only morgage?
[re: MarkV]
02/13/03 08:19 AM
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The key is how long you are planning to keep the house. If its just a few years, interest only may make sense since mortgage interest is a huge proportion of the total monthly payment in the first few years of the mortgage. You are also maximizing your leverage with this type of mortgage, so if you do sell and prices have gone up, your rate of return will be astronomical.
I've done a balloon type mortgage twice, although both were amortized as 30 year loans, so I did build some equity over the life of the loan. The first time it was a 7 year loan which I converted to a conventional loan at seven years. The second was a five year which I paid off through a home equity line of credit. The line of credit gives me flexibility to do big ticket home repairs and is a lot cheaper than refinancing through a conventional mortgage. The loan had zero closing costs and fees and is at 4.25%. Disadvantages are its relatively short term - 10 years with the principal balance amortized over 20 years, and the variable interest rate (if rates start to go up again).
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MarkV
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Re: Interest only morgage?
[re: AndyF]
02/13/03 08:39 AM
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Thanks for the reply Andy. I don't know if we are interested in something like this or not. We will be making a move with in the next 5 years and would like to save the 2.5% of interest for that time. At present we are 12 years into a 30 year mortgage and have 300k + equity in this house. Just trying to learn more about the options that are available.
MarkV
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EJB
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Re: Interest only morgage?
[re: MarkV]
02/13/03 08:56 AM
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>>I had always looked at them as a way to let people buy what they could not afford. It particularly upset me seeing young couples buying houses with almost nothing down and thinking of the amount of debt they are setting themselves up with.
I think your instincts are right. There is little reason for an interest only mortgage, except to lower the payments, which in almost all cases, is so that people can buy more than they othersie could afford.
My advice, in general, would be to avoid them.
I have been doing a lot of reading lately about the "housing bubble" and the more I read, the more it makes me very very nervous. If housing prices falter, and it doesn't even need to be by much, it could make the stock market bubble of the late 90's look benign.
My advice to anyone right now would be to avoid stretching to pay for any type of house (i.e. buy one that costs less than what the bank tells you can afford, don't overpay for a house and just assume its going to continue to increase in value and you can sell it for more to the "next guy", and most importantly, agressively pay down your mortgage to get the monkey off your back as quickas you can.
If anyone is interested, do some searchs on the internet on "fannie mae" you can find a lot of reading to keep you awake at night 
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Stoneheartfarm
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Re: Interest only morgage?
[re: EJB]
02/13/03 11:45 AM
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Beware the interest only mortgage. Housing prices do rise and fall, (despite conventional wisdom). The odds are that there are some localized bubbles out there. Meaning that one particular city or region may be experiencing prices that are unsupportable.
Also, many of these programs have recapture clauses in them, which means that the Mortgagee (lender), will take part of the equity gain at sale. This is to offset the loss from the lower interest rate. So, if you buy the house for $10K and put $1k into it, selling for $11k, there is no penalty. But, if you buy for $10K, hold it for a year and sell for $11k without putting anything else into it, you will owe the Mortgagee a portion of the $1k gain. Sometimes it happens that these clauses are not adequately explained to the Mortgagors, or that the Mortgagors don't understand the implications until about 5 years down the road. In a growing housing market it can really hurt.
Just my opinion, but I wouldn't touch one myself.
Steve
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EJB
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Re: Interest only morgage?
[re: EJB]
02/13/03 12:02 PM
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Just re-read my posts, and just want to make sure it didn't seem like I was lecturing you or telling you want to do in your specific situation, nobody knows your siutation better than you, and as I said, in most cases I would think the interest only mortgages are not a good idea, but your situation could be the one where it makes perfect sense...my ranting was more a complaint of what you touched upon, which has become a huge pet peeve for me lately, and thats the easily available credit that is being extended to people that really have no business buying a house (or at least not one so expensive) and the likes of the federal reserve and fannie mae are encouraging the bubble, but you and me as taxpayers, are the ones on the hook if/when it all goes south.
(i.e. fannie mae guarantees the principal and interest payments of most mortgages in this country, and the taxpayers are the ones that would need to come up with the money).
So hopefully I wasn't on my soap box too long...I'll get off now. 
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wingnut
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Re: Interest only morgage?
[re: EJB]
02/14/03 12:29 PM
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So hopefully I wasn't on my soap box too long...I'll get off now
same soapbox my wife was on yesterday ... we were talking about the way our tax dollars were being spent and she started to rant about "when did owning a house suddenly become a constitutional right" (I think we got there somehow from "affirmative action". 
it's a shame that common sense isn't
http://www.dahlhausminiatures.com
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EJB
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Re: Interest only morgage?
[re: wingnut]
02/14/03 12:52 PM
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Its not the owning it that bothers me so much as the what happens when too many people start walking away from their mortgages because the value of the house is much less than what they owe on it...not many people realize that for the vast majority of mortgages out there, the federal government (read taxpayers) are ultimately guaranteeing the principal and interest payments on their mortgage.
And the value of those guarantees far exceeds the $6400000000000 national debt (6.4Trillion).
Seems like a huge ponzi scheme to me, but what do I know
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Alan_L_Texas
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Re: Interest only morgage?
[re: MarkV]
02/14/03 01:55 PM
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I agree that interest-only would make sense only if you are holding to sell. For that, I think it is a good approach.
Alan L. - Texas
North of Mustang
South of Bugtussle
On the Banks of Buck Creek
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MarkV
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Re: Interest only morgage?
[re: MarkV]
02/16/03 06:54 PM
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Thanks everyone for the input. Looks like mostly we all agree that these types of loans require a special set of circumstances to be practical. Not sure we fit into that set of circumstances or not. Fortunately we have an advisor we have used for years and feel comfortable with so I will see what his take on our situation is.
Thanks again,
MarkV
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Gary_in_Indiana
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Re: Interest only morgage?
[re: MarkV]
02/17/03 07:06 PM
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Around 1978 I was victim of something worse than an 'interest only' mortgage. I had a 'Graduated Payment Mortgage' which actually increased the principle of the loan balance over either the first four or first five years. The idea, of course, was to qualify buyers for more house (e.g. larger purchase price/higher mortgage amount) by stepping up the payment over 5 years at which time it would remain stable for the balance of the loan.
My $40,000 loan had a payoff of something in excess of $43,000 a few years into the loan before it began to amortize. In a market where values are increasing and the borrower is able to make the increased payments each year that's probably not a terrible thing. However, in this world of economic cycles, it can be awful for someone who doesn't put a large amount down and then finds themselves needing to sell in a static or declining real estate market.
Simply put, if you can guarantee that the value of the property will increase and guarantee that you'll be able to either liquidate or successfully refinance at a payment you can afford when the balloon comes due an interest only loan might be OK. Absent those guarantees, however, I'd avoid them like the flu.
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sam4scot
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Re: Interest only morgage?
[re: MarkV]
09/11/03 03:15 PM
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Another positive of the interest only loan is the fact that 100% of your home payment continues to be tax deductible. So when you couple that benefit with the lower interest rate the effective monthly payment is typically much lower than a standard 30 year mortgage. There is a good example of the principle given by financial advisor Rick Edelman in his book titled The New Rules of Money dealing with two brothers. The power of the interest only technique is only fully realized if you are able to take the savings and place them in investments yielding reasonable rates of return. If you are like many Americans, the savings will just go to other things so it depends on whether you want to support your family and lifestyle or some bank and Uncle Sam.
In your case, after 12 years of a mortgage you are now to a point where only a percentage of your payment is tax deductible. Also, if you lose your job, typically it is more difficult to refinance your home. Thus, the additional equity that many have built in their homes has not served them as well as they assumed it would due to the loss of employment coupled with a soft economy. It is definitely a buyer's market and under those conditions many have lost jobs and discovered that their home equity is not as easy to access as they were led to believe.
All the Best,
Sam
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Peter
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Hello all, I am Peter. I want to share some information about Interest only mortgages.
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egon
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Re: Hi
[re: Peter]
08/28/06 04:32 AM
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Good morning Peter and welcome.
How about sharing some of your personal data with us. It only takes a few minutes of your time to locate and fill out your profile.
Egon
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Michael
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Re: Interest only morgage?
[re: MarkV]
09/21/06 11:36 AM
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I don't know where you are moving to, but with 300k in equity, you should be able to pay cash for a very nice house. Then continue to pay yourself a mortgage payment every month and you will have a huge nest egg and no worries about the housing bubble or rising interest rates.
You ARE a redneck if... you knew someone whose last words were "Hey y'all, watch this!"
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Handyman
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Re: Interest only morgage?
[re: Michael]
11/22/06 10:36 PM
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Ahem..... If any of you care to look, you might notice that this thread is 3 yrs old... lol 
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Re: Interest only morgage?
[re: Handyman]
02/21/07 10:51 PM
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you might take a look at daveramsey.com.
He is a financial talk radio guy that isnt selling junk.shoots straight.
I trust him.
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Richard
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Re: Interest only morgage?
[re: MarkV]
01/30/08 06:16 AM
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Just meandering around in here & saw this thread again.
Kind of intersting topic with hindsight as to what real estate prices have done lately (in some places)
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kellenw
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Re: Interest only morgage?
[re: Richard]
02/27/08 10:24 PM
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Interest only loans CAN BE a good thing in some limited situations. When housing markets sour, a person is able to secure a home when they otherwise might not have been able to afford one. IF they are willing to weather the storm (the bad market) and wait for it to clear (become a good market again) they can walk away with a little profit and have saved a great deal in taxes by turning otherwise non-deductible rent (assuming they'd otherwise be in an apartment) into deductible interest expense. The KEY is being able to weather the storm for however long that takes.
The downside is that many people who get into interest only loans already have poor spending habits. They often get into a situation where they can no longer afford their interest only payment and must sell the home. They find out that the home can't sell for enough money to cover their original loan amount plus realty agent fees (if they use one), and they must choose bankruptcy. Ouch... both for the person and for the economy as a whole.
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