Need advice on the pros and cons of interest only loans

[temeculaguy]

Cyphire, we were typing at the same time so I didn’t read yours until after I posted. Yes, short term plans would give I/O another appeal but from memory of another post she was going to be there long term, I could be wrong. But again, right now is not the best time, even with your financial means, to start a planned two year purchace. Seriously, tell me you don’t think buying today will allow someone to sell at a profit in two years. For most buying today they are likely to be required to stay put until the other side of the cycle (which may be more than 4 years), I/O is not the right move for June 2007, maybe June 2005 or June 2003 but not June 2007. The risk of buying today is that you may have to ride it out, it is better to be prepared for that.

Good point Perry, having it paid off at retirement should be the goal.

[temeculaguy]

Cyphire, we were typing at the same time so I didn’t read yours until after I posted. Yes, short term plans would give I/O another appeal but from memory of another post she was going to be there long term, I could be wrong. But again, right now is not the best time, even with your financial means, to start a planned two year purchace. Seriously, tell me you don’t think buying today will allow someone to sell at a profit in two years. For most buying today they are likely to be required to stay put until the other side of the cycle (which may be more than 4 years), I/O is not the right move for June 2007, maybe June 2005 or June 2003 but not June 2007. The risk of buying today is that you may have to ride it out, it is better to be prepared for that.

Good point Perry, having it paid off at retirement should be the goal.

[cyphire]

I guess your right – for most people it isn’t the way to go. I haven’t been in any house longer than 6 years – so thats the appeal for me. And I couldn’t imagine being in the same house too long – whether prices are going up or down. But because they are going down (with my short term mindframe – I would never buy a house in this market.) Lets see what 2 years has to offer.

Also – my equity is my company – not my house. I would rather take the excess and build up savings / portfolio and then sell the house in the future with my cost basis being my mortgage. If you are in it for the next 30 years – I would agree int only isn’t the way to go.

[cyphire]

I guess your right – for most people it isn’t the way to go. I haven’t been in any house longer than 6 years – so thats the appeal for me. And I couldn’t imagine being in the same house too long – whether prices are going up or down. But because they are going down (with my short term mindframe – I would never buy a house in this market.) Lets see what 2 years has to offer.

Also – my equity is my company – not my house. I would rather take the excess and build up savings / portfolio and then sell the house in the future with my cost basis being my mortgage. If you are in it for the next 30 years – I would agree int only isn’t the way to go.

[NotCranky]

I used a 5 year I/O for 2 1/2 years,improved my cash flow when I could really take advantage of it , paid it off and got home ownership mortgage free! That makes me the expert on I/O. IMHO. It is on the thread I linked in a earlier post on this thread.
BTW just teasing about the expert stuff.
Except for the rich it is a recipe for disaster in todays market. Temecula guy nailed the appropriate time frame for the rest of us, 3-5 years ago with an exit strategy.

[NotCranky]

I used a 5 year I/O for 2 1/2 years,improved my cash flow when I could really take advantage of it , paid it off and got home ownership mortgage free! That makes me the expert on I/O. IMHO. It is on the thread I linked in a earlier post on this thread.
BTW just teasing about the expert stuff.
Except for the rich it is a recipe for disaster in todays market. Temecula guy nailed the appropriate time frame for the rest of us, 3-5 years ago with an exit strategy.

[Hopeful]

If you can get an interest only loan at a fixed rate for a longer term (eg. 10-30 years), then why not? I never understood why anyone would lock themselves into a higher payment on a 15 year term vs a 30 year term. Yes I know the interest rate can be slightly lower, however you can always pay more toward principal each month (or one month a year – your choice) on a 30 year loan as if it were a 15 year term, but you are not bound to the higher payment each and every month. This works for an interest only loan also – there is no reason why you can’t pay more toward the principal whenever you want (provided you have the cash). You have the best of both worlds that way …

[Hopeful]

If you can get an interest only loan at a fixed rate for a longer term (eg. 10-30 years), then why not? I never understood why anyone would lock themselves into a higher payment on a 15 year term vs a 30 year term. Yes I know the interest rate can be slightly lower, however you can always pay more toward principal each month (or one month a year – your choice) on a 30 year loan as if it were a 15 year term, but you are not bound to the higher payment each and every month. This works for an interest only loan also – there is no reason why you can’t pay more toward the principal whenever you want (provided you have the cash). You have the best of both worlds that way …

[NotCranky]

“If you can get an interest only loan at a fixed rate for a longer term (eg. 10-30 years),”

I tend to agree with this at least nearer to the 30 year term. The mortgage ammount should be practically meaningless by then and having a fixed principal payment should beat rent at some point no matter the market at loan inception date. I have not heard of a loan like a 20 or 30 year I/O. Has anyone? Maybe its the next great thing? Hey how about 50 you could just die in the house.
It would be better to start the 30 year or longer I/O after the market corrects though.

[NotCranky]

“If you can get an interest only loan at a fixed rate for a longer term (eg. 10-30 years),”

I tend to agree with this at least nearer to the 30 year term. The mortgage ammount should be practically meaningless by then and having a fixed principal payment should beat rent at some point no matter the market at loan inception date. I have not heard of a loan like a 20 or 30 year I/O. Has anyone? Maybe its the next great thing? Hey how about 50 you could just die in the house.
It would be better to start the 30 year or longer I/O after the market corrects though.

[anxvariety]

I might get an IO in an appreciating market, but otherwise I don’t see much of a reason. The rich don’t pay interest on something that’s depreciating. I guess if the difference between IO and another mortgage can be used to make more than the IO interest rate then maybe it would make sense? With renting as an option I just don’t see how anyone could make a convincing argument for IO.

[anxvariety]

I might get an IO in an appreciating market, but otherwise I don’t see much of a reason. The rich don’t pay interest on something that’s depreciating. I guess if the difference between IO and another mortgage can be used to make more than the IO interest rate then maybe it would make sense? With renting as an option I just don’t see how anyone could make a convincing argument for IO.

[Alex_angel]

Can’t you get a 10 year I/O that has a fixed rate and at year 11, your loan is then amoratized for 20 years at the same rate? You pretty much turn it into a 20 eyar fixed rate loan. With my calculations your per month price would go up %30. If you can plan and save , then when the 10 years is up you should be able to make up the %30 increase per month.

[Alex_angel]

Can’t you get a 10 year I/O that has a fixed rate and at year 11, your loan is then amoratized for 20 years at the same rate? You pretty much turn it into a 20 eyar fixed rate loan. With my calculations your per month price would go up %30. If you can plan and save , then when the 10 years is up you should be able to make up the %30 increase per month.

[CMcG]

I am not new here, though I keep having problems logging in, so I had to create a new account. Some of you may remember my story: I bought my house in February from a relative who gave me $100K in equity so that I had a 20 percent down payment and don’t have to pay mortgage insurance. I have a 30/yr fixed rate at 6.25, but the first 10 years are interest only. That’s all I can afford right now, but I expect a substantial inheritance within those 10 years. I am 50; I’m 15 years away from retirement. I love this house and will die in this house. I’m only suggesting, as some of you have, that every situation is different. I have been constantly reminded by a colleague, “Don’t put faith in an inheritance.” I’m not. Plan B is that my kid in med school will take over the payments in 2017, that he’ll move in with his future wife, and I will be assured of having a place to live.

[Author]

Posts