Interest Only Mortgage

To me an IO mortgage is a bad idea unless you are 1. able to get a rate at or under 4%, AND 2. are disciplined enough to also pay down the principle, AND 3. Lucky enough that the amount of your home appreciates substantially after you own it.

An interest only (IO) mortgage means that you are only paying the interest for the mortgage loan and you are never touching the principle purchase price. So if your home appreciates in value you would only get the amount of the appreciation less the amount for the realtor fees and moving expenses and some taxes. But, if your house depreciates in value, then you are in serious trouble because when you want to sell it and have to sell it for less than you purchased it for you as a seller will have to come up with the cash and give it to the bank at the closing for a loss.

A lot of people end up becoming upside down on their home this way because the house is worth less than what they originally paid for it after you take away those fees, so then the seller then has no downpayment for their next home.

While you would be able to deduct the interest you pay on your home for taxes (if you don't meet AMT) OR if the president does not do away with this deduction, you are not saving any money.

If you think you can save more money elsewhere it may be good for you, but most people are not self disciplined enough to take their money and invest it - so home ownership is basically like forced savings plans.

DH and I considered doing it.

it's not a bad idea if you definitely don't plan on living there more than 10 years. (for a 10/1 ARM)

you have to understand that if you're not paying on the principal of your house, you're not building equity unless your house appreciates in value.

of course, you can always pay on principal on your own.

it definitely allows for flexibility. I think it's ok for people who want a lower monthly payment and only want to live there for 10 yrs or less.

it's a tough call...

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Posted by lrs2005

If you think you can save more money elsewhere it may be good for you, but most people are not self disciplined enough to take their money and invest it - so home ownership is basically like forced savings plans.

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not sure I understand what you mean here.

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Posted by dleeny

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Posted by lrs2005

If you think you can save more money elsewhere it may be good for you, but most people are not self disciplined enough to take their money and invest it - so home ownership is basically like forced savings plans.

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not sure I understand what you mean here.

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She means that some people who take out iO loans decide to put the money they are saving every payment (compared to a 30yr fixed) into some sort of savings account that gains interest.

The problem though is... you would have to find some sort of savings that will net you at least 5% risk-free for it to be worthwhile. Thats not always an easy task.

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Posted by DjPiLL

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Posted by dleeny

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Posted by lrs2005

If you think you can save more money elsewhere it may be good for you, but most people are not self disciplined enough to take their money and invest it - so home ownership is basically like forced savings plans.

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not sure I understand what you mean here.

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She means that some people who take out iO loans decide to put the money they are saving every payment (compared to a 30yr fixed) into some sort of savings account that gains interest.

The problem though is... you would have to find some sort of savings that will net you at least 5% risk-free for it to be worthwhile. Thats not always an easy task.

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funny, we never saw it that way. we just wanted to lower our monthly payment.

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Posted by DjPiLL

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Posted by dleeny

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Posted by lrs2005

If you think you can save more money elsewhere it may be good for you, but most people are not self disciplined enough to take their money and invest it - so home ownership is basically like forced savings plans.

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not sure I understand what you mean here.

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She means that some people who take out iO loans decide to put the money they are saving every payment (compared to a 30yr fixed) into some sort of savings account that gains interest.

The problem though is... you would have to find some sort of savings that will net you at least 5% risk-free for it to be worthwhile. Thats not always an easy task.

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Thanks Mr. Pill, that is it exactly.

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Posted by dleeny

funny, we never saw it that way. we just wanted to lower our monthly payment.

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If you are taking an iO loan out to just lower the payment because you can't afford a 30yr fixed payment... thats usually not advisable. You are buying too much house.

Use one of the 'affordability calculators' out there to find out how much house you can afford.



The people that take out iO loans, even though they can easily afford the 30yr fixed payment, usually take out the iO loans because they want to invest their money saved in the payment.

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Posted by DjPiLL

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Posted by dleeny

funny, we never saw it that way. we just wanted to lower our monthly payment.

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If you are taking an iO loan out to just lower the payment because you can't afford a 30yr fixed payment... thats usually not advisable. You are buying too much house.

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well, that's why we haven't bought anything... and probably won't

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Posted by dleeny

well, that's why we haven't bought anything... and probably won't

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Then you should continue to wait it out and save for a downpayment. Taking an iO loan in this market is asking for MAJOR trouble. You run a very good chance of being upside down on your loan which is very bad.

iO loans are mainly geared towards investment buyers... people buying rental properties... or people that prefer to have the financial flexibility of where they are putting their money towards.

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Posted by lrs2005

I would look into first time homeowner programs to see if you qualify for any mortgage payment plans that are not IO before locking in an IO mortgage.

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I think you have make less than $70K to qualify for assistance programs.

Agree on all parts. We are buying a condo in AZ and took out a 10/1 IO. We are planning on keeping it for about 3-5 years tops.

Our home here in NY is financed with a 30 year fixed conventional loan.

The condo is an investment and is a short term buy.

With the price of homes here iin NY I'm not surprised that many people are looking at IO loans. It's very tempting.

My sister and BIL bought with an IO loan and it makes sense for them because he's in construction and she's in real estate. So they don't have a 'steady' income, instead they get huge loads of cash all at once. Their current house is IO as well and they're almost done paying it...in less than 5 years.

I on the other hand will buy with a conventional mortgage and lock in the lowest rate possible for 30 years.

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Posted by SomethingBlu

My sister and BIL bought with an IO loan and it makes sense for them because he's in construction and she's in real estate. So they don't have a 'steady' income, instead they get huge loads of cash all at once. Their current house is IO as well and they're almost done paying it...in less than 5 years.

I on the other hand will buy with a conventional mortgage and lock in the lowest rate possible for 30 years.

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Sasha... take me with you!

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Posted by dleeny

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Posted by SomethingBlu

My sister and BIL bought with an IO loan and it makes sense for them because he's in construction and she's in real estate. So they don't have a 'steady' income, instead they get huge loads of cash all at once. Their current house is IO as well and they're almost done paying it...in less than 5 years.

I on the other hand will buy with a conventional mortgage and lock in the lowest rate possible for 30 years.

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Sasha... take me with you!

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Be careful what you wish for. I'll really do it. You already know Bill can come work with me!!

I'm praying that our offer is accepted...I can't wait to show you pictures.

Dina - there's nothing here. Except for future hurricanes!!

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Posted by SomethingBlu

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Posted by dleeny

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Posted by SomethingBlu

My sister and BIL bought with an IO loan and it makes sense for them because he's in construction and she's in real estate. So they don't have a 'steady' income, instead they get huge loads of cash all at once. Their current house is IO as well and they're almost done paying it...in less than 5 years.

I on the other hand will buy with a conventional mortgage and lock in the lowest rate possible for 30 years.

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Sasha... take me with you!

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Be careful what you wish for. I'll really do it. You already know Bill can come work with me!!

I'm praying that our offer is accepted...I can't wait to show you pictures.

Dina - there's nothing here. Except for future hurricanes!!

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GA can get them too!

Send those pics!! I am dying to see them!!!!!!!!!

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Posted by dleeny

GA can get them too!

Send those pics!! I am dying to see them!!!!!!!!!

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Not where I'm at...the coast yes, but I'm inland. But in any case...come with me!!

Anyway...pray Dina...pray that we get the house!!

Although there are real issue going on. And my prayers are with Janet and Keith right now.