Patb, I don’t see why there is only one class of buyer who will use an I/O loan effectively.
[quote=patb]it struck me there is only one class of buyer who will use an I/O loan effectively. Someone who by nature will have a very serious increase in their income soon. Recent graduates from med school, People starting new small businesses (Franchises), people in apprenticeship programs.
But that’s maybe 1-2% of all buyers. I/O’s are otherwise a tool for flippers. if you aren’t amortizing the debt you will see a big spike in
payments, and for what?[/quote]
For those with 10 yr I/O loans, I don’t see why they could not afford the payments in the future?
Assume when they purchased a home with $3800 payment at 30% debt to income ratio. This would be about $152k annual or $13.7k monthly household income. Not much of a stretch. Now, fast forward 10 years with at nominal 3% annual pay increases. The income now would be $204k annual or $17.0k monthly. There is $4k of additional income to pay the maximum $2800 increase to $6700. If the borrowers happened to paid all their bills in the 10 years, they should have enough income to pay for the increase. If they did not work for a company that gets 3%+ year over year annual pay increases, then this type of loan wasn’t for them.
I have a coworker and his wife in a secure aerospace jobs that did the 10 yr IO loan in 2004 and he and his wife gets at least the annual 3% increase each and every year. Now, they may be upside down, but they still will be able to afford the payment. I believe his means met his ends and may come out unscathed. My coworker had to move to get his kids into a better Jr High & High School. The 3 and 5 yr I/O loans will have problems under these specific conditions.
I highly doubt there is any 10 yr I/O loans available, I haven’t checked. I might actually consider it now that home values are somewhat down and if we are in for a high inflationary period. I would even put my bank money as a down…
