Interest-Only Loans? (1 Viewer)

[Jerry Almeida]

Anyone ever use this option before when buying a house? I've done quite a bit of reading on it and feel like I've got a decent handle on it. However, I'd also like to hear about any experiences the folks at HTF have had with them.

Thanks

 

[Keith Mickunas]

I heard about these a while back, but I have no idea why you'd go this route. What are the advantages of these loans? Seems like if your property value went down you'd be in a world of hurt. My friend's loan officer couldn't understand why people wanted them and would try to steer people away from them.

 

[Todd Hochard]

As I see it, it's just one more vehicle to get you into more home than you can really afford. This trend toward buying as much monthly as you can has driven home prices up unreasonably, IMO.

 

[Francois Caron]

If I understand this correctly, you make your monthly payments and you have nothing to show for it. Isn't that called rent?

 

[DaveF]

My sense is it would be effective if you planned to live there for less than five years and the house value would increase significantly in that time. Your total payment would be less than with a traditional mortgage and you'd come out ahead.

But generally, it seems like a way to buy more house with lower payments in the short term, with questionable finances in the future.

 

[Tim Markley]

Obviously you people don't live in an area where the home values increase significantly like here in CA. Interest only loans are very popular here. If you're not going to pay off the loan, why does it matter as long as the value of the house is going up? I recently sold my house and bought a new house. My new mortgage is interest only and it's perfect for me. I have no intention of ever paying off this house and the interest that I pay on the loan is tax deductible. How could anyone confuse this with renting? You OWN the house and are building equity. The lower mortgage payment frees up more of my money for investing or anything else I want it for. Obviously this wouldn't be a good idea in an area where the housing market sucks.

 

[Malcolm R]

Sounds to me like the mortgage holder (i.e. the bank) owns the house, and will always own the house.

 

[Jerry Almeida]

Thanks Tim, finally someone with an actual experience with them and not just an opinion on them.

Just kidding, opinions are always welcome, but I asked for experiences because most of what I've heard is negative and it usually seems like it comes from people who actually haven't used this option.

Let me just say that I'm not looking for someone to justify this for me, because the chances are high that we're not going to go this route. But before I totally dismiss it as an option I wanted to hear from people who've done it.

Tim,
I'm not sure how far into the interest-only period you are, but do you plan on selling before the interest-only period ends? If not, do you have an idea of how much your payments will go up when the interest-only period does end?

 

[Julie K]

I agree with Tim. The housing market in California is insane. It's not a matter of someone wanting more home than they can reasonably afford - it's a matter of someone just wanting a home.

I wouldn't want an interest-only loan for myself. I plan on staying in my home until it's paid for (or nearly so) and I was fortunate in getting a low price for the house in the first place. But I do think that these loans are valuable for some people in high-price markets like CA, and unlike renting, you can still deduct the interest and you can still sell the home later for hopefully a higher price.

 

[Tim Markley]

Jerry - I'm going through escrow right now so my loan hasn't actually started yet. I don't have the paperwork handy since I'm at work but I will tell you that this is not a long-term situation for my family. We will probably be in this house anywhere from 5-10 years. If we stay past the interest only portion of the loan, we will simply refinance at that time.

The bank has a lien on the property but my name is on the title as the owner just like as if I used a traditional loan. If you rent, your name is not on the title, you can't deduct mortgage interest on your taxes, you don't build equity and you can't sell the property. I really don't see how anyone could possibly compare this to renting.

 

[DaveF]

I just want to point out that my wild guess of an opinion is exactly what Tim said he's doing. I'm going to bask in my own greatness for a while.

j/k

I'll have to remember that in case I move to CA.

 

[Graham Perks]

I'm glad I switched from a 30 year mortgage to a 15. The 30 year sure is close to "interest only" for the first few years. After three years I barely had any equity built up. By the time the average person moves, call it after seven years, barely any principal has been paid off, you move and start another 30 years back at almot square one.

The 15 year loan has three times as much money going to principal each month right from the start. That's money going straight to my personal bottom line, not the bank's. That's "building equity" right there. After seven years I'll have a nice chunk paid off!

I can't say I'd refer to an interest-only loan as "building equity". Building rather implies that you are actually doing something! With an interest-only loan you are just betting that house prices will rise. They could of course come down or just stay flat.

Being able to deduct something for taxes isn't necessarily a great thing. If you can rent cheaper than mortgage-interest-less-taxes then renting removes the exposure to house market prices. Having a mortgage paid off completely is far better than whoopee-I-can-deduct-interest!

Admittedly, if I lived in California I would probably have to get some 103% financing, interest-only style financing myself!

But if you can afford to be paying down some principal, surely that is better than just paying the bank every month. 15 or 30 years down the road, I'll be sitting very very happy and you'll still be paying.

Admittedly, if I lived in California I would probably have to get some 103% financing, interest-only style financing myself!

 

[Todd Hochard]

For the life of me, I cannot fathom how the housing market in CA can continue, or even sustain, its recent pace. To an outsider, it looks like the .com bubble around January of 2000. I'm glad I'm not in it.

 

[Mark Paquette]

Jerry,

I did an interest only loan on my most recent house purchase. This is a new house so it will most likely go up in value and I don't plan on living there more than 5-7 years. So I figure even I never pay a dime in principal I will still make some money due to the house appreciating in value. Plus with the interest only loan I have I can pay principal at anytime without penalty. If anyone has ever looked at an amortization schedule for a 30 year mortage you'll notice that for about 15 years you pay very, very little in principal anyway. At the beginning of the loan most of your payment is interest. I think interest only loans are great if you don't plan on living in the house more that 10 years and you're fairly certain the vaule of the house will appreciate. That's my $.02.

 

[BrianB]

That's the gotcha though, isn't it?

 

[Mark Paquette]

No, not really. I've owned 3 houses and all of them have appreciated in value. Some homes appreciate more, such as lake property. People need someplace to live so there will always be a demand for houses.

 

[Eric_L]

As I understand it, the payments on an interest only mortgage are not fixed. A borrower may pay down the principal whenever they please, and when they do, the minimum interest payment is instantly adjusted to reflect the new principal balance.

This is very unlike a 30yr or 15 yr fixed where your payment is what your payment is, regardless of any additional amount you pay.

Interest only mortgages actually are not best for people who intend to make minimum payments, but on the contrary are for people who have the self-control to make principal payments. the loan pays off on the borrowers terms rather than the lenders.

Amateur financial advice is a painful thing to read, almost as bad as amateur medical advice.

The primary benefit of a mortgage is not tax, not low rates, not even low payments. It is OPM - other peoples money. The other features just make it even more attractive.

Using OPM for 30 years or even 15 years is attractive because inflation grows at 3% per year on average. The dollars you pay your last year off with will be worth less than half what the dollars you use to pay the first years payments with - and the payments never increase! (unlike rent)

That alone justifies OPM, but then taxes, rates, equity growth (a long term constant, not short term) and investing can make it incredibly attractive.

Interest only loans are not for amateurs o the undisciplined. They are for the financially savvy. Over the long term most people do not have the sophistication to use it correctly. (It'd be like watching 4:3 on a widescreen!) For the average Joe who does not want to learn in depth financial theory (or hire someone who does) a 30 yr loan coupled with 401k savings is the best start.

 

[Eric_L]

Appreciation is not guranteed, however for as long as there is inflation there is upward pressure on house prices. Ther will be occasional corrections, but when measured by the decade, house prices will always go up. (replacement value on structures. Land just isnt being made anymore - it is a limited commodity)

 

[Todd Hochard]

Is this sort of condescension really necessary to get your point across?