Need advice on the pros and cons of interest only loans

[cyphire]

I agree with the I/O points – it was immaterial to me whether prices went up down or sideways when I got my loan. The problem with home ownership is that it is so equity illiquid as well as monthly cost consuming. I liked the I/O because it improved cash flow which is sometimes useful. I am in the process of starting a new business – and every entrepreneur knows one of the secrets of starting a business is keeping monthly expenses low. A higher monthly payment means even more money tied up in a house (to pay it down), and unless the plan is to keep it for a good portion of the mortgage period, it sometimes makes sense.

The best use of money is not to tie it up in paying off your house – the best use of money is to have it working for you. If you use standard investment risk/reward (5%, 6%, 8%?) I would agree that you might as well pay down the house (if you are going to stay there for 10 years or longer). And I would also agree that for many if not most people they should not go interest only. But if you are self employed, and want to grow your business you should not tie ANY extra money in paying off a house, you should invest it where it will create the most return.

If you have a stable job working for the man… then have the regular mortgage based on the number of years you expect to stay in the home.

For my last house – I put down 25% (500K) and financed 75% (1.5M). Interest only and I had the choice of further investing in one of my companies or selling it. We chose selling it which made the cash situation moot. The main business could always reverse and need extra cash – I hate to commit to locking up money to pay off a house.

[cyphire]

I agree with the I/O points – it was immaterial to me whether prices went up down or sideways when I got my loan. The problem with home ownership is that it is so equity illiquid as well as monthly cost consuming. I liked the I/O because it improved cash flow which is sometimes useful. I am in the process of starting a new business – and every entrepreneur knows one of the secrets of starting a business is keeping monthly expenses low. A higher monthly payment means even more money tied up in a house (to pay it down), and unless the plan is to keep it for a good portion of the mortgage period, it sometimes makes sense.

The best use of money is not to tie it up in paying off your house – the best use of money is to have it working for you. If you use standard investment risk/reward (5%, 6%, 8%?) I would agree that you might as well pay down the house (if you are going to stay there for 10 years or longer). And I would also agree that for many if not most people they should not go interest only. But if you are self employed, and want to grow your business you should not tie ANY extra money in paying off a house, you should invest it where it will create the most return.

If you have a stable job working for the man… then have the regular mortgage based on the number of years you expect to stay in the home.

For my last house – I put down 25% (500K) and financed 75% (1.5M). Interest only and I had the choice of further investing in one of my companies or selling it. We chose selling it which made the cash situation moot. The main business could always reverse and need extra cash – I hate to commit to locking up money to pay off a house.

[tugg49]

Just financed the wife’s education and internship using an interest only loan. I’m on the last year and going to have to bite the bullet and re-fi. I’ve got the original price of the house safely built up in equity and plan to sell in the future. I may even get another I/O loan. Building income power is a good use of the I/O loan. Buying new cars and boats may not be. I paid a bit on the equity during the I/O loan but I’d say don’t plan on paying too much to equity. Life gets in the way and the ol’ grasshopper and the ant scenario reveals we are closer to grasshoppers than ants. Most guidance is negative but specific cases can utilize an I/O loan to an advantage. I’d do it. I’m living in 3000 s.f. for 1500 a month. I’d be 75 with a 30 year when the last check is written. Ain’t gonna happen.

[tugg49]

Just financed the wife’s education and internship using an interest only loan. I’m on the last year and going to have to bite the bullet and re-fi. I’ve got the original price of the house safely built up in equity and plan to sell in the future. I may even get another I/O loan. Building income power is a good use of the I/O loan. Buying new cars and boats may not be. I paid a bit on the equity during the I/O loan but I’d say don’t plan on paying too much to equity. Life gets in the way and the ol’ grasshopper and the ant scenario reveals we are closer to grasshoppers than ants. Most guidance is negative but specific cases can utilize an I/O loan to an advantage. I’d do it. I’m living in 3000 s.f. for 1500 a month. I’d be 75 with a 30 year when the last check is written. Ain’t gonna happen.

[PerryChase]

CMcG, sorry I offended you. I apologize.

I too had help when I bought my first house. As I grew older, I’ve learned to take the breaks that life hands you but not to live with the hope of a future event happening your way. You have to make it happen yourself.

You seem to have very Asian, or traditional European (Italian) outlook on life.

I would never expect my child to live with me when he grows up. He’ll have a life of his own. If life events bring parents and children back under the same roof, then fine. But expecting your child to live with and care for you in your old age is a lot of pressure for both parent and child.

Just my own philosophy.

[PerryChase]

CMcG, sorry I offended you. I apologize.

I too had help when I bought my first house. As I grew older, I’ve learned to take the breaks that life hands you but not to live with the hope of a future event happening your way. You have to make it happen yourself.

You seem to have very Asian, or traditional European (Italian) outlook on life.

I would never expect my child to live with me when he grows up. He’ll have a life of his own. If life events bring parents and children back under the same roof, then fine. But expecting your child to live with and care for you in your old age is a lot of pressure for both parent and child.

Just my own philosophy.

[jeeman]

“How does ANYONE not have help from others in this market? Especially for a first-time buyer?”

There are plenty of people who buy in this market who have done it themselves. We have chosen not to because we don’t want to lose $8k/month in the value of the home. But we could easily afford to do so, without any help from family or friends. And we would be first time home buyers here in San Diego if we were to do so.

Just be careful on expecting future money from others. Doctors can start making alot of money way down the road, but they want to reward themselves first for the years of hard studying and residency. I sure wouldn’t want to impose on my family for paying for a house that I overpaid for. That burden on them can strain relationships, even if they agree to “cover you”. And you can’t be sure that the future daughter-in-law will want her in-law to live in the same house.

Jeeman

[jeeman]

“How does ANYONE not have help from others in this market? Especially for a first-time buyer?”

There are plenty of people who buy in this market who have done it themselves. We have chosen not to because we don’t want to lose $8k/month in the value of the home. But we could easily afford to do so, without any help from family or friends. And we would be first time home buyers here in San Diego if we were to do so.

Just be careful on expecting future money from others. Doctors can start making alot of money way down the road, but they want to reward themselves first for the years of hard studying and residency. I sure wouldn’t want to impose on my family for paying for a house that I overpaid for. That burden on them can strain relationships, even if they agree to “cover you”. And you can’t be sure that the future daughter-in-law will want her in-law to live in the same house.

Jeeman

[what_a_disasta]

“Imagine what life would be like if had no housing expenses.”

I think you would need to live outside the US for that, due to property taxes. When the city of San Diego finally goes bankrupt, I imagine that they will reassess/increase rates as an emergency measure rather than lose their annuities.

Even if there were no tax, maintaining and insuring your home is not cheap. The idea of owning a home ‘free and clear’ in the US is not based in reality.

http://en.wikipedia.org/wiki/Eminent_domain

[what_a_disasta]

“Imagine what life would be like if had no housing expenses.”

I think you would need to live outside the US for that, due to property taxes. When the city of San Diego finally goes bankrupt, I imagine that they will reassess/increase rates as an emergency measure rather than lose their annuities.

Even if there were no tax, maintaining and insuring your home is not cheap. The idea of owning a home ‘free and clear’ in the US is not based in reality.

http://en.wikipedia.org/wiki/Eminent_domain

[NotCranky]

Why do you want to make such an extreme case? what_a_disasta
Unless it is the end of the world a person who only has taxes and insurance to pay is in the drivers seat. Especially if they stay away from redevelopement zones and freeways.Even if the house gets taken by “emininet domain” the owner gets paid.
“The idea of owning a home ‘free and clear’ in the US is not based in reality.”
The idea of being free isn’t either but I don’t care to quit breathing.

BTW when the U.S took over California after the Mexican American war, Mexican land owners kept possesion of their lands,by treaty. I hope they return the favor.

[NotCranky]

Why do you want to make such an extreme case? what_a_disasta
Unless it is the end of the world a person who only has taxes and insurance to pay is in the drivers seat. Especially if they stay away from redevelopement zones and freeways.Even if the house gets taken by “emininet domain” the owner gets paid.
“The idea of owning a home ‘free and clear’ in the US is not based in reality.”
The idea of being free isn’t either but I don’t care to quit breathing.

BTW when the U.S took over California after the Mexican American war, Mexican land owners kept possesion of their lands,by treaty. I hope they return the favor.

[what_a_disasta]

Easy tiger!

I was just saying that there is no such thing as life without housing expenses.

I can imagine scenarios where the retired owner might be better of with fixed income investments than a paid off house. Would you disagree?

[what_a_disasta]

Easy tiger!

I was just saying that there is no such thing as life without housing expenses.

I can imagine scenarios where the retired owner might be better of with fixed income investments than a paid off house. Would you disagree?

[NotCranky]

Grrrrrrrrrrrr..lol

having a free and clear house might not be the best case scenario for anyone …sure I agrrrrrrrrrrree. I’ve posted on what a dilema it can be, from personal experience, several times in the last week or so. I think it is on the “Would you have done this” thread and on the one and only thread I have ever started ,”for those of you on the sidelines.

[Author]

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