what is an Interest-Only Mortgage

[patb]

Seriously,

They get tossed around, people use them, Some people even
claim that they provide advantages,

But let’s think about it.

Most IO’s are a 2-28 or 8-22, where you pay the interest, and
then, “Payoff at an accelerated rate” the Deferred amortization.

Well, if ou can’t afford the payments at the front, it’s fairly unlikely
you will afford it later, so instead you refi into another IO if you can.
so you go another couple of years paying the interest only.

Lather, Rinse, Repeat.

Take it to the extreme.

You are 25, you buy a house, 40 years later, you are still
paying the interest only.But still owe all the principal, and
you are looking at Retirement.

In principle, what the IO mortgage appears to be is an
institutionalized form of Serfdom. You owe the landlord
forever, and you are in debt forever.

if you want to move, or change jobs, you have been paying rent on
the money for 10 years, but you have to handle selling and finding
a buyer for your peonage,

[AK]

Depends on how it’s structured and used I guess … IMO I don’t know that IO is any better or worse than an equivalent fully-amortized ARM.

Assuming even the pathetic 3% annual raises that seem to be standard these days, you’re looking at about a 27% increase in income at the end of an 8-year IO period. I doubt the increase to a fully amortized payment is as large as 27%.

(Rate shock is another matter entirely, of course.)

[AK]

Depends on how it’s structured and used I guess … IMO I don’t know that IO is any better or worse than an equivalent fully-amortized ARM.

Assuming even the pathetic 3% annual raises that seem to be standard these days, you’re looking at about a 27% increase in income at the end of an 8-year IO period. I doubt the increase to a fully amortized payment is as large as 27%.

(Rate shock is another matter entirely, of course.)

[meadandale]

Not all IO loans are the same.

I, for instance, got an IO option on my first mortgage when I bought my house in 2003. My second was always fully amortized. Both are 30 year fixed loans.

I elected to pay IO for the first few years I was in the house on the first mortgage. Then I called the bank and increased my mortgage payment to start paying principle.

It gave me some breathing room while I adjusted to a much higher payment than I was paying in rent. I could have afforded the whole nut but I knew my salary would be rising so took advantage of the lower payment for a short time.

There is nothing wrong with these loans if used correctly. I haven’t pulled a penny out of my house and I have zero consumer debt other than a car payment.

[meadandale]

Not all IO loans are the same.

I, for instance, got an IO option on my first mortgage when I bought my house in 2003. My second was always fully amortized. Both are 30 year fixed loans.

I elected to pay IO for the first few years I was in the house on the first mortgage. Then I called the bank and increased my mortgage payment to start paying principle.

It gave me some breathing room while I adjusted to a much higher payment than I was paying in rent. I could have afforded the whole nut but I knew my salary would be rising so took advantage of the lower payment for a short time.

There is nothing wrong with these loans if used correctly. I haven’t pulled a penny out of my house and I have zero consumer debt other than a car payment.

[blahblahblah]

For 90% of the people using interest-only loans, they are essentially a very dumb, expensive, risky way to rent a house by substituting a bank for the landlord. For 5% of people, they are a great way to get into a house when it’s known that their salary will be increasing dramatically soon (soon-to-be doctors, lawyers, etc…) For the other 5% (wealthy, successful RE investors), they are an essential tool for maximizing leverage and reducing carrying costs. They are just a tool and unfortunately a lot of people have used them incorrectly…

[blahblahblah]

For 90% of the people using interest-only loans, they are essentially a very dumb, expensive, risky way to rent a house by substituting a bank for the landlord. For 5% of people, they are a great way to get into a house when it’s known that their salary will be increasing dramatically soon (soon-to-be doctors, lawyers, etc…) For the other 5% (wealthy, successful RE investors), they are an essential tool for maximizing leverage and reducing carrying costs. They are just a tool and unfortunately a lot of people have used them incorrectly…

[NotCranky]

Beside Concho remarks “interest only” are good as a source of “cheap capital” at the right times for the right people. Basic requirements for it to be a “good loan” are that the borrower be in an extremely good equity position and have a good plan for using the capital, hopefully a nearly fool proof business plan or investment and even better an exit strategy to cover. What is even better about “interest only” is that some come with a decent teaser rate. Old school was that only people who could demonstrate that they meet the kinds of parameters I am describing could get them . Let’s hope they stay available.

[NotCranky]

Beside Concho remarks “interest only” are good as a source of “cheap capital” at the right times for the right people. Basic requirements for it to be a “good loan” are that the borrower be in an extremely good equity position and have a good plan for using the capital, hopefully a nearly fool proof business plan or investment and even better an exit strategy to cover. What is even better about “interest only” is that some come with a decent teaser rate. Old school was that only people who could demonstrate that they meet the kinds of parameters I am describing could get them . Let’s hope they stay available.

[SD Realtor]

Not sure why everyone has conveniently overlooked the fact that most people don’t own a home for 30 years or even for 10 years. If I buy a home and can earn a better return then the mortgage then why wouldn’t I get an interest only loan. I know many sharp people who get the IO loan and get better returns on the saved capital.

I don’t think IO loans are for everybody. I am not a fan of deferring interest, teaser rates, or backend loading. I am a fan of maximizing returns on capital investment, leverage if it is done properly, and analyzing your own situation to see what is best for you. My standard recommendation to the “average” couple buying a home THAT PLANS TO STAY FOR A LONG TIME > 10 years would be to grab a standard 30 year amortization period fixed rate loan. However, for people who know they will relocate in several years, or for professionals who are very confident that they will earn a better return on an investment rather then paying the principal then I let them run as they please.

SD Realtor

[SD Realtor]

Not sure why everyone has conveniently overlooked the fact that most people don’t own a home for 30 years or even for 10 years. If I buy a home and can earn a better return then the mortgage then why wouldn’t I get an interest only loan. I know many sharp people who get the IO loan and get better returns on the saved capital.

I don’t think IO loans are for everybody. I am not a fan of deferring interest, teaser rates, or backend loading. I am a fan of maximizing returns on capital investment, leverage if it is done properly, and analyzing your own situation to see what is best for you. My standard recommendation to the “average” couple buying a home THAT PLANS TO STAY FOR A LONG TIME > 10 years would be to grab a standard 30 year amortization period fixed rate loan. However, for people who know they will relocate in several years, or for professionals who are very confident that they will earn a better return on an investment rather then paying the principal then I let them run as they please.

SD Realtor

[(former)FormerSanDiegan]

I re-fied with an I/O loan in ’03 for my rental property purchased in ’02. I typically pay the equivalent of the fully amortized amount for most months. Between tenants or when there is a large expense (e.g. new hot water tank), I drop to the I/O only for cash flow purposes.

At the time of purchase my loan was 80% LTV. Currently It’s about 50-60% LTV. I could pay the loan off with other assets, but it makes more sense from a tax/investment planning in my case not to do so.

The problem I/O loans are those layered with others risks, such as 100% LTV, low FICO, minimal assets, etc.

In the right hands I/O loans are useful and non-toxic.

[(former)FormerSanDiegan]

I re-fied with an I/O loan in ’03 for my rental property purchased in ’02. I typically pay the equivalent of the fully amortized amount for most months. Between tenants or when there is a large expense (e.g. new hot water tank), I drop to the I/O only for cash flow purposes.

At the time of purchase my loan was 80% LTV. Currently It’s about 50-60% LTV. I could pay the loan off with other assets, but it makes more sense from a tax/investment planning in my case not to do so.

The problem I/O loans are those layered with others risks, such as 100% LTV, low FICO, minimal assets, etc.

In the right hands I/O loans are useful and non-toxic.

[AK]

Liquidity is nice, but I doubt the average person can earn a consistent after-tax return exceeding the interest on an IO mortgage.

[AK]

Liquidity is nice, but I doubt the average person can earn a consistent after-tax return exceeding the interest on an IO mortgage.

[Author]

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