Interest only morgage?

[Gary_in_Indiana]

Around 1978 I was victim of something worse than an 'interest only' mortgage. I had a 'Graduated Payment Mortgage' which actually increased the principle of the loan balance over either the first four or first five years. The idea, of course, was to qualify buyers for more house (e.g. larger purchase price/higher mortgage amount) by stepping up the payment over 5 years at which time it would remain stable for the balance of the loan.

My $40,000 loan had a payoff of something in excess of $43,000 a few years into the loan before it began to amortize. In a market where values are increasing and the borrower is able to make the increased payments each year that's probably not a terrible thing. However, in this world of economic cycles, it can be awful for someone who doesn't put a large amount down and then finds themselves needing to sell in a static or declining real estate market.

Simply put, if you can guarantee that the value of the property will increase and guarantee that you'll be able to either liquidate or successfully refinance at a payment you can afford when the balloon comes due an interest only loan might be OK. Absent those guarantees, however, I'd avoid them like the flu.

[sam4scot]

Another positive of the interest only loan is the fact that 100% of your home payment continues to be tax deductible. So when you couple that benefit with the lower interest rate the effective monthly payment is typically much lower than a standard 30 year mortgage. There is a good example of the principle given by financial advisor Rick Edelman in his book titled The New Rules of Money dealing with two brothers. The power of the interest only technique is only fully realized if you are able to take the savings and place them in investments yielding reasonable rates of return. If you are like many Americans, the savings will just go to other things so it depends on whether you want to support your family and lifestyle or some bank and Uncle Sam.

In your case, after 12 years of a mortgage you are now to a point where only a percentage of your payment is tax deductible. Also, if you lose your job, typically it is more difficult to refinance your home. Thus, the additional equity that many have built in their homes has not served them as well as they assumed it would due to the loss of employment coupled with a soft economy. It is definitely a buyer's market and under those conditions many have lost jobs and discovered that their home equity is not as easy to access as they were led to believe.

All the Best,
Sam

[Peter]

Hello all, I am Peter. I want to share some information about Interest only mortgages.

[egon]

Good morning Peter and welcome.

How about sharing some of your personal data with us. It only takes a few minutes of your time to locate and fill out your profile.

Egon

[Michael]

I don't know where you are moving to, but with 300k in equity, you should be able to pay cash for a very nice house. Then continue to pay yourself a mortgage payment every month and you will have a huge nest egg and no worries about the housing bubble or rising interest rates.

[Handyman]

Ahem..... If any of you care to look, you might notice that this thread is 3 yrs old... lol [img]/forums/images/icons/ooo.gif[/img] [img]/forums/images/icons/grin.gif[/img]

[rdbigfarmboy]

you might take a look at daveramsey.com.
He is a financial talk radio guy that isnt selling junk.shoots straight.
I trust him.

[Richard]

Just meandering around in here & saw this thread again.

Kind of intersting topic with hindsight as to what real estate prices have done lately (in some places)

[kellenw]

Interest only loans CAN BE a good thing in some limited situations. When housing markets sour, a person is able to secure a home when they otherwise might not have been able to afford one. IF they are willing to weather the storm (the bad market) and wait for it to clear (become a good market again) they can walk away with a little profit and have saved a great deal in taxes by turning otherwise non-deductible rent (assuming they'd otherwise be in an apartment) into deductible interest expense. The KEY is being able to weather the storm for however long that takes.

The downside is that many people who get into interest only loans already have poor spending habits. They often get into a situation where they can no longer afford their interest only payment and must sell the home. They find out that the home can't sell for enough money to cover their original loan amount plus realty agent fees (if they use one), and they must choose bankruptcy. Ouch... both for the person and for the economy as a whole.

[nicoledc109]

I agree that interest-only would make sense only if you are holding to sell. For that, I think it is a good approach.

I also aree with you :d