Interest Only Loan

for you experts out there.... what in your opinion are the cons for an interest only home loan (aside from the possibility of interest rates going way up)?

TIA

I wouldn't do one. Short term Interest rates are going up defnitely at least one more time. There are different types of interest only loans. But when you make your monthly payment, you are not paying any principal whatsoever and when it finally does adjust to a fixed rate, you can't know what that rate will be until it happens (long term rates are market driven). If you plan on living in the house and fixing it up and moving in less than 5 years, then they are ok. People are doing it hoping that housing prices will continue to skyrockt (which imo they won't!!)

it's really only good for people who are flipping the house and aren't staying there for long

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Posted by dleeny

for you experts out there.... what in your opinion are the cons for an interest only home loan (aside from the possibility of interest rates going way up)?

TIA

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Ask yourself this question. Are you considering this because you can't afford the 30yr fixed monthly payment? If the answer is yes... you can't afford this house and should forget the IO loan.

I have no idea why anybody would want an IO loan. The interest rates are higher than a fixed or an ARM. They offer no security if the intrest rates jump.

Unless you are an investor... don't go IO.

Here is a senario

WHat if you go for that now and you know for a fact your salary is going to double in 2 yrs.

Cant you in the five years go for a different mortgage?

I have to say that interest only loans such as a 7/1 or a 10/1 have a fixed rate for 7 or 10 years respectively, then the rate will go somewhere...most go up. If you plan on staying in the house a while your best bet is the conforming loan. Right now the rates are higher for the conforming loan..about .25%.

Interest only loans are a good way to get into a house you wouldn't ordinarily be able to afford but it does carry risk.

There are transaction fees with re-financing that could make it not make sense at the time your interest rate changes..mostly closing costs that equal what you originally spent.

It really depends on your risk tolerance. I'm buying a condo right now as an investment for a few years and I'm using a 10/1 interest only loan. The interest rate is 6.25. I will flip this property in between 2-5 years. I would not have an interest only loan on my residence though, I feel it's too risky.

HTH

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Posted by dbleplay17

Here is a senario

WHat if you go for that now and you know for a fact your salary is going to double in 2 yrs.

Cant you in the five years go for a different mortgage?

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Nothing is for sure. When you re-finance, you have to be a good credit risk, hope the rates are good and you will be spending another $10K+ in closing costs just to get the rate fixed and hope the rates make sense to offset your transactions costs.

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Posted by DjPiLL

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Posted by dleeny

for you experts out there.... what in your opinion are the cons for an interest only home loan (aside from the possibility of interest rates going way up)?

TIA

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Ask yourself this question. Are you considering this because you can't afford the 30yr fixed monthly payment? If the answer is yes... you can't afford this house and should forget the IO loan.

I have no idea why anybody would want an IO loan. The interest rates are higher than a fixed or an ARM. They offer no security if the intrest rates jump.

Unless you are an investor... don't go IO.

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that is not correct. you can get a fixed interest rate for the life of the IO loan. In addition, you can pay towards the principal of the house at any time during the IO loan.

the reason why this is one of our options is b/c over the course of 3 years with a fixed loan, you are paying around $10K towards the principal of the house - if that. all the rest is interest.

with an IO loan, if you are disciplined and put lets say $500 a month towards the principal of the house in addition to the monthly payment (which is much lower than a fixed loan), you would have paid $18K towards the principal.

And over the course of 7 years, you would have put $42K towards the principal!

big difference!

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Posted by dleeny

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Posted by DjPiLL

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Posted by dleeny

for you experts out there.... what in your opinion are the cons for an interest only home loan (aside from the possibility of interest rates going way up)?

TIA

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Ask yourself this question. Are you considering this because you can't afford the 30yr fixed monthly payment? If the answer is yes... you can't afford this house and should forget the IO loan.

I have no idea why anybody would want an IO loan. The interest rates are higher than a fixed or an ARM. They offer no security if the intrest rates jump.

Unless you are an investor... don't go IO.

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that is not correct. you can get a fixed interest rate for the life of the IO loan. In addition, you can pay towards the principal of the house at any time during the IO loan.

the reason why this is one of our options is b/c over the course of 3 years with a fixed loan, you are paying around $10K towards the principal of the house - if that. all the rest is interest.

with an IO loan, if you are disciplined and put lets say $500 a month towards the principal of the house in addition to the monthly payment (which is much lower than a fixed loan), you would have paid $18K towards the principal.

And over the course of 7 years, you would have put $42K towards the principal!

big difference!

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D - I think you got your facts straight. My sister is doing an ARM with an IO loan for her new house (almost 6000 sq ft! ) and is excited about it because the interest IS fixed and she gets to pay extra toward the principal while her mo. payment will be much lower. She's a RE agent and knows her stuff, her mortgage/loan officer actually recommended this to her because it's great for those people who could afford to send lump payments or extra payments to their mortgage every month or once every few months. She will pay off her house faster and will take advantage of the low interest rates.

Do all your research - which I'm sure you will - but it sounds good. This is what I plan on doing as well...

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Posted by dleeny

with an IO loan, if you are disciplined...

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Exactly. *IF* you are diciplined. Its very easy to say that now. But when that monthly mortgage payment comes with that low payment... the temptation will be there to just pay down the interest with no principal.

'Ahhh... lets skip this month's principal because we need money to pay for car repairs'

'Ahhh... lets skip this month's principal because Joey needs new school clothes'

'Ahhh... lets skip this month's principal because its December and we need to buy holiday presents'


Doing a fixed 30yr mortgage does not give you this option... and frankly I feels it allows you to budget better. You don't have to worry about interest rates rising. Yeah you can get a fixed IO loan... but the interest rates are still higher than a fixed conforming loan. Even a half point higher can lead to tens of THOUSANDS of additional interest money paid and wasted.


And for the person that feels her salary *may* double in two years. Nothing is guaranteed. If you feel you will be getting a great job soon... then wait and save your pennies now. Then you will have plenty of cash saved for a downpayment... and will be able to make a wise financial decision on your mortgage and get a low rate.

And everyone seems to think 'well we can always refinance'. Refinancing costs MONEY... can run as high as 10k!

I don't understand why anyone would simply want to throw out ten thousand dollars like its nothing.

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Posted by DjPiLL

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Posted by dleeny

with an IO loan, if you are disciplined...

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Exactly. *IF* you are diciplined. Its very easy to say that now. But when that monthly mortgage payment comes with that low payment... the temptation will be there to just pay down the interest with no principal.

'Ahhh... lets skip this month's principal because we need money to pay for car repairs'

'Ahhh... lets skip this month's principal because Joey needs new school clothes'

'Ahhh... lets skip this month's principal because its December and we need to buy holiday presents'


Doing a fixed 30yr mortgage does not give you this option... and frankly I feels it allows you to budget better. You don't have to worry about interest rates rising. Yeah you can get a fixed IO loan... but the interest rates are still higher than a fixed conforming loan. Even a half point higher can lead to tens of THOUSANDS of additional interest money paid and wasted.


And for the person that feels her salary *may* double in two years. Nothing is guaranteed. If you feel you will be getting a great job soon... then wait and save your pennies now. Then you will have plenty of cash saved for a downpayment... and will be able to make a wise financial decision on your mortgage and get a low rate.

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I definitely do not feel my salary might double, that would be nice though!

we're just starting out with this process and got pre-approved for a loan this morning.

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Posted by DjPiLL

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Posted by dleeny

with an IO loan, if you are disciplined...

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Exactly. *IF* you are diciplined. Its very easy to say that now. But when that monthly mortgage payment comes with that low payment... the temptation will be there to just pay down the interest with no principal.

'Ahhh... lets skip this month's principal because we need money to pay for car repairs'

'Ahhh... lets skip this month's principal because Joey needs new school clothes'

'Ahhh... lets skip this month's principal because its December and we need to buy holiday presents'


Doing a fixed 30yr mortgage does not give you this option... and frankly I feels it allows you to budget better. You don't have to worry about interest rates rising. Yeah you can get a fixed IO loan... but the interest rates are still higher than a fixed conforming loan. Even a half point higher can lead to tens of THOUSANDS of additional interest money paid and wasted.


And for the person that feels her salary *may* double in two years. Nothing is guaranteed. If you feel you will be getting a great job soon... then wait and save your pennies now. Then you will have plenty of cash saved for a downpayment... and will be able to make a wise financial decision on your mortgage and get a low rate.

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I definitely see your points and in my case they may be true. I love to put things off.

An IO loan will work for my sister because her hubby is in construction and she's in RE so they tend to get money in a non-regular basis but in lump sums, so this works for them.

Not so much for me who's on a fixed income with no variation...but in theory it sounds nice! And the rate, at least where we're looking, is the same whether IR or traditional.

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Posted by SomethingBlu

I definitely see your points and in my case they may be true. I love to put things off.

An IO loan will work for my sister because her hubby is in construction and she's in RE so they tend to get money in a non-regular basis but in lump sums, so this works for them.

Not so much for me who's on a fixed income with no variation...but in theory it sounds nice! And the rate, at least where we're looking, is the same whether IR or traditional.

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Well like I said... a fixed 30yr is much better for budgeting purposes.

But of course if you work off commission... or get lumps of cash at a time... your budget is already screwed up so an IO loan wont make it any worse.


I am just a fan of 'Pay the lowest interest rate you can FOR THE LIFE OF THE LOAN'.

Have you ever looked at a mortgage calculator. Punch in how much interest over the life of a 400k loan 6% will run you? Then change the interest rate to 7% and you are paying approximately 120k more in interest!

120k is a LOT of cash!

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Posted by DjPiLL
Well like I said... a fixed 30yr is much better for budgeting purposes.

But of course if you work off commission... or get lumps of cash at a time... your budget is already screwed up so an IO loan wont make it any worse.


I am just a fan of 'Pay the lowest interest rate you can FOR THE LIFE OF THE LOAN'.

Have you ever looked at a mortgage calculator. Punch in how much interest over the life of a 400k loan 6% will run you? Then change the interest rate to 7% and you are paying approximately 120k more in interest!

120k is a LOT of cash!

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You're right...for me it makes no sense but for my sister and her DH it does.

And yes, the interest change is insane!! Of course I'm moving to a state where $200K buys you a huge house (so that's my price range).

Just a little factoid:

Right now the interest rate on a 10/1 interest only is 6.25%-no points. Interest rate on a 30 year fixed non-jumbo is 6.375-no points. In this case the interest only loan is lower than the conforming.

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Posted by Blu-ize

Just a little factoid:

Right now the interest rate on a 10/1 interest only is 6.25%-no points. Interest rate on a 30 year fixed non-jumbo is 6.375-no points. In this case the interest only loan is lower than the conforming.

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we got quoted 6.25 from WAMU today on a 30 yr fixed.

Those rates are pretty bad actually. I just checked out a few places and I am seeing 5.75 and 5.875 ZERO points and ZERO lending fees. 30 year fixed conforming.

My question is... how much of a higher intrest rate will you pay if you go IO? I have a feeling it will be quite a bit more.

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Posted by DjPiLL

Those rates are pretty bad actually. I just checked out a few places and I am seeing 5.75 and 5.875 ZERO points and ZERO lending fees. 30 year fixed conforming.

My question is... how much of a higher intrest rate will you pay if you go IO? I have a feeling it will be quite a bit more.

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Rich, where are you getting these rates? Is this dependent on your credit as well? We were getting 6.25%-6.5% in GA & everyone thought that was good...please let me know if I should go elsewhere because we'll be buying in the next 3 months! Thanks!