Need advice on the pros and cons of interest only loans

[jan777]

My husband and I just bought a brand new home. We need to make a decision on what type of loan we want to do. We have excellent credit. We bought the house for $582,000 and have about $300,000 to put towards the loan. What are the pros and cons of interest only?

If you’re wondering why we bought at this time let me give you a brief history.

In early 2006 KB started preselling these homes in South Corona. Because of major permit problems and unearthing indian artifacts which took 10 months to resolve (that is an interesting story) 90% of the presold homes cancelled. Now KB is trying to move these homes quickly. Our home which originally was selling for $800,000 with upgrades we bought for $582,000. The house is 3700 sq ft. The community only has 30 homes and is in a very nice location. KB is also paying our closing costs.

We know that we are taking a risk and if anything else we will live in a really nice home for years.

Any advice on the interest only loan or any other loan would be greatly appreciated.

[Anonymous]

If you’re going to take an interest only loan, then why wouldn’t you just rent? I just don’t understand the mindset of Socal home buyers (or should I say lack of mind?).

[Anonymous]

If you’re going to take an interest only loan, then why wouldn’t you just rent? I just don’t understand the mindset of Socal home buyers (or should I say lack of mind?).

[jan777]

I didn’t say we were going to take an interest only loan I am simply asking for the pros and cons of the loan.

[jan777]

I didn’t say we were going to take an interest only loan I am simply asking for the pros and cons of the loan.

[NotCranky]

Here is one thread on this topic:
http://piggington.com/what_is_an_interest_only_mortgage

[NotCranky]

Here is one thread on this topic:
http://piggington.com/what_is_an_interest_only_mortgage

[Anonymous]

The only pro is it lets you get into a house you otherwise couldn’t afford. But common sense says if you can’t afford the house with a traditional loan then you shouldn’t buy it.

[Anonymous]

The only pro is it lets you get into a house you otherwise couldn’t afford. But common sense says if you can’t afford the house with a traditional loan then you shouldn’t buy it.

[cyphire]

I disagree. If you have the financial acumen, interest only is the way to go. Keep saving money each month, build up equity outside of your home. Do you plan on staying in this house for a very long time? If not, interest only is better. Why use your house as a savings account? Now that being said – if you are only paying interest only you better be saving! If you find yourself spending all your income each month, then you bought too much house.

By the way deadzone – I had an interest only mortgage for the last 2 years. I could afford 2 houses or more at that payment level – but I still don’t like the fact that if you stay in the house short term you increased your payment but really didnt get any equity relief.

[cyphire]

I disagree. If you have the financial acumen, interest only is the way to go. Keep saving money each month, build up equity outside of your home. Do you plan on staying in this house for a very long time? If not, interest only is better. Why use your house as a savings account? Now that being said – if you are only paying interest only you better be saving! If you find yourself spending all your income each month, then you bought too much house.

By the way deadzone – I had an interest only mortgage for the last 2 years. I could afford 2 houses or more at that payment level – but I still don’t like the fact that if you stay in the house short term you increased your payment but really didnt get any equity relief.

[temeculaguy]

It isn’t so much about the deal as the personal financial situation. How close are you to retirement? What will that retirement be funded by? What is your income? What were you paying before and was that comfortable? What are your other investments? Some of this you may not be comfortable disclosing but it is the only way to get sound advice.

I can only guess, but I/O is probably wrong for you. It works when you have a rapidly increasing market and decreasing interest rates, it worked for many about 2-5 years ago, bit it’s time is over. And even when it was working it was a short term soloution for people fearing they would be priced out and had significant earnings increase potential (doctor/laywer/etc just starting out).

Why postpone paying for your house, with that kind of downpayment you could probably take a 15 yr fixed if you are aprox fifteen years from retirement. Why is a 30 year loan the benchmark today for “aggresive.” I know some genius is telling you to go I/O and then invest the difference but most people don’t, they spend it. If I/O is the only way to have a house and money to invest for retirement then you can’t really afford the house. Personally I think interest rates will rise slowly over the next few years, fix while you can and take the gamble out of your primary residence, gamble in other areas of you portfolio.

[temeculaguy]

It isn’t so much about the deal as the personal financial situation. How close are you to retirement? What will that retirement be funded by? What is your income? What were you paying before and was that comfortable? What are your other investments? Some of this you may not be comfortable disclosing but it is the only way to get sound advice.

I can only guess, but I/O is probably wrong for you. It works when you have a rapidly increasing market and decreasing interest rates, it worked for many about 2-5 years ago, bit it’s time is over. And even when it was working it was a short term soloution for people fearing they would be priced out and had significant earnings increase potential (doctor/laywer/etc just starting out).

Why postpone paying for your house, with that kind of downpayment you could probably take a 15 yr fixed if you are aprox fifteen years from retirement. Why is a 30 year loan the benchmark today for “aggresive.” I know some genius is telling you to go I/O and then invest the difference but most people don’t, they spend it. If I/O is the only way to have a house and money to invest for retirement then you can’t really afford the house. Personally I think interest rates will rise slowly over the next few years, fix while you can and take the gamble out of your primary residence, gamble in other areas of you portfolio.

[PerryChase]

It’s a forever mortgage, meaning you never pay it back, even in a thousand years, if you keep on refinancing from interest only to interest only.

If you can earn a higher interest rate from investing your money elsewhere, then go for it. But be sure to save if you go interest only.

The problem is that home equity used to be hard to get to. We have now monetized home equity; and when when people have money it burns a hole in their pockets. They spend it on SUVs, boats, fancy clothes, etc…

Personally, I like the peace of mind of having my house paid off at retirement. Imagine what life would be like if had no housing expenses. You could be goofing-off, traveling and taking it easy. I guess you could do that on home-equity too… ’til it’s time to pay the piper.

[PerryChase]

It’s a forever mortgage, meaning you never pay it back, even in a thousand years, if you keep on refinancing from interest only to interest only.

If you can earn a higher interest rate from investing your money elsewhere, then go for it. But be sure to save if you go interest only.

The problem is that home equity used to be hard to get to. We have now monetized home equity; and when when people have money it burns a hole in their pockets. They spend it on SUVs, boats, fancy clothes, etc…

Personally, I like the peace of mind of having my house paid off at retirement. Imagine what life would be like if had no housing expenses. You could be goofing-off, traveling and taking it easy. I guess you could do that on home-equity too… ’til it’s time to pay the piper.

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