Buying a house and only paying interest every month

[bolido2000]

My sister was telling me that her friend bought a $400K house and she financed the whole amount (no downpayment). The interest rate is around 4% locked for 4 years and she pays $2000 dollars every month, which covers ONLY the interests. She plans to keep the house and sell it in 4 years assuming the value will go up (this is SoCal, so it is very likely) and pocket the difference. Commom sense tells me that when all you can pay every month is just the interest it is not a good deal, but at the same time it seems wiser than just renting. Comments?

 

A $400K house in SoCal? What is that, some kind of shack?

 

[TimMyMac]

Sounds like renting from the bank to me, but, I'm not a banker. If she thinks she'll get some extra cash out of it at the end that's fine but, if your not paying ANY of your accuall debt I don't see how you could get a value increase that would make up for 24 grand a year and still leave with a profit that would be worth anything... but what do I know...

 

[her209]

That means, she has to sell the house for more than $496,000. Don't forget I didn't include property tax and what not.

 

[bolido2000]

It's a condo in SFV. I agree. After 4 years her expense is going to be probably $130K (just a guess). A big gambling nevertheless.

 

[FoBoT]

if the real estate market collapes, then she just abandons it? leaves it to foreclosure?

 

[bolido2000]

Originally posted by: FoBoT
if the real estate market collapes, then she just abandons it? leaves it to foreclosure?

Probably. This is real state speculation at it's best.

 

[HappyPuppy]

Your sister's friend is unbelieveably stupid. She is going to lose her arse.

At $2000/mo. her APR is @ 6.25 plus she is paying taxes and insurance. There is no way she can ever even sell the house to break even.

 

[KingNothing]

It's a bit of a gamble, but whereas renting is a 100% guarantee that you're not getting your money back, this at least has a chance. What would a comparable place cost to rent per month? Also, she should make sure she has enough insurance to cover the mortgage in case something happens to the house.

 

[OS]

Originally posted by: bolido2000
My sister was telling me that her friend bought a $400K house and she financed the whole amount (no downpayment). The interest rate is around 4% locked for 4 years and she pays $2000 dollars every month, which covers ONLY the interests. She plans to keep the house and sell it in 4 years assuming the value will go up (this is SoCal, so it is very likely) and pocket the difference. Commom sense tells me that when all you can pay every month is just the interest it is not a good deal, but at the same time it seems wiser than just renting. Comments?

I don't see how this is any smarter than renting, since you have to pay property tax and maintenance in this setup and you aren't even building equity. You'll never actually own the house.

Also I doubt prices in socal will go up any more. Supposedly prices have gone down a couple percent since last year.

 

[OS]

Originally posted by: bolido2000

Originally posted by: FoBoT
if the real estate market collapes, then she just abandons it? leaves it to foreclosure?

Probably. This is real state speculation at it's best.

heh, and some people say there is no bubble.

 

[StageLeft]

It sounds bad initially but it's not horrendous. If you buy a house with a 30 year loan and put no money down the ballpark of 90% of each payment at the beginning is only interest. She's merely shaving it down. Considering that many people change houses often - say every 3-5 years - then the amount a person actually pays down on the principle during that 3-5 year period, if they had a 30 year mortgage, is pretty small. So her principle is not paid down, but anybody who moves in 3-5 years hasn't had theirs paid down much either. If you aggreissively invest you can make a bette return than on a mortgage rate...take that into account (ie. that extra few hundred a month could give you a better return elsewhere), along with the tax deductibility of mortgage interests, and it's not that bad an idea. To me it smacks of monetary irresponsibility - since most people with this will only do it to buy more house - but if it's done properly it could have a good return for the person.

 

[bolido2000]

Originally posted by: OS

Originally posted by: bolido2000
My sister was telling me that her friend bought a $400K house and she financed the whole amount (no downpayment). The interest rate is around 4% locked for 4 years and she pays $2000 dollars every month, which covers ONLY the interests. She plans to keep the house and sell it in 4 years assuming the value will go up (this is SoCal, so it is very likely) and pocket the difference. Commom sense tells me that when all you can pay every month is just the interest it is not a good deal, but at the same time it seems wiser than just renting. Comments?

I don't see how this is any smarter than renting, since you have to pay property tax and maintenance in this setup and you aren't even building equity. You'll never actually own the house.

Also I doubt prices in socal will go up any more. Supposedly prices have gone down a couple percent since last year.

That's something I don't understand because according to her she is building equity. She said that when you borrow the 400K from the bank the house is yours and you just pay back the money to the bank (which in this case is 0 since is all interest).

 

[StageLeft]

Originally posted by: bolido2000

Originally posted by: OS

Originally posted by: bolido2000
My sister was telling me that her friend bought a $400K house and she financed the whole amount (no downpayment). The interest rate is around 4% locked for 4 years and she pays $2000 dollars every month, which covers ONLY the interests. She plans to keep the house and sell it in 4 years assuming the value will go up (this is SoCal, so it is very likely) and pocket the difference. Commom sense tells me that when all you can pay every month is just the interest it is not a good deal, but at the same time it seems wiser than just renting. Comments?

I don't see how this is any smarter than renting, since you have to pay property tax and maintenance in this setup and you aren't even building equity. You'll never actually own the house.

Also I doubt prices in socal will go up any more. Supposedly prices have gone down a couple percent since last year.

That's something I don't understand because according to her she is building equity. She said that when you borrow the 400K from the bank the house is yours and you just pay back the money to the bank (which in this case is 0 since is all interest).

She is only building equity as the house appreciates. Normally a mortgage principle goes down over time; even if the house does not increase in value net worth is gained. But in this case no net worth increases unless the house appreciates. If it goes down her net worth could begin to fall, but that's going to be the case for any house owner.

 

[her209]

Another point, she can claim the interest payments on the mortgage for tax deduction, right?

 

[StageLeft]

Originally posted by: her209
Another point, she can claim the interest payments on the mortgage for tax deduction, right?

Yep and that can be worth quite a lot. With interest of $24k/year that's a pretty serious deduction right there.

 

[jeremy806]

Do not confuse the investment decision with the financing decision.

On that note, I am too conservative to leverage that much.

Jeremy

 

[KCjeeper]

The idea of the interest-only loan is that you invest what you would have paid in principal into a vehcile that earns you higher interest.

Say your full rate is 6% on the house, but you have a way to earn 12% via a good stock or mutual fund. Pay interest, and invest the difference in the investment vehicle. It can be a smart financial move for some. If you have questions about how this works you can visit my girlfriends site at http://deecole.net where she does this kind of thing all the time.

 

[HappyPuppy]

She is gambling that the CA bubble will continue to expand. It won't. It will burst and in another decade it will begin to inflate again. Her gamble has all the odds against her.

 

[vi edit]

In the right market and if you have good financial discipline to put that saved principal payment to good use it's not a bad move.

 

[spidey07]

Its a very good idea.

If you're only keeping the home for less than 5 years interest only is a great idea (depending on location of course). goodie tax deductions, plus larger profit when you sell.

my next home will be interest only.

 

[spidey07]

Originally posted by: Skoorb
It sounds bad initially but it's not horrendous. If you buy a house with a 30 year loan and put no money down the ballpark of 90% of each payment at the beginning is only interest. She's merely shaving it down. Considering that many people change houses often - say every 3-5 years - then the amount a person actually pays down on the principle during that 3-5 year period, if they had a 30 year mortgage, is pretty small. So her principle is not paid down, but anybody who moves in 3-5 years hasn't had theirs paid down much either. If you aggreissively invest you can make a bette return than on a mortgage rate...take that into account (ie. that extra few hundred a month could give you a better return elsewhere), along with the tax deductibility of mortgage interests, and it's not that bad an idea. To me it smacks of monetary irresponsibility - since most people with this will only do it to buy more house - but if it's done properly it could have a good return for the person.

plus houses appreciate at a propotional rate no matter how much the house cost, depending on location (of course)

 

[FlyLice]

Originally posted by: bolido2000
My sister was telling me that her friend bought a $400K house and she financed the whole amount (no downpayment). The interest rate is around 4% locked for 4 years and she pays $2000 dollars every month, which covers ONLY the interests. She plans to keep the house and sell it in 4 years assuming the value will go up (this is SoCal, so it is very likely) and pocket the difference. Commom sense tells me that when all you can pay every month is just the interest it is not a good deal, but at the same time it seems wiser than just renting. Comments?

Better off in vegas.

BUT, in the history of the real estate market, housing prices (aggregate across the US) have NEVER gone down.

BUT, condo prices HAVE gone down, especially when interest rates rose, and that is a very risky investment.

AND, when interest rates go up, she is FVCKED.

Good luck to her.

 

[z0mb13]

keep in mind the interest payments are also deductible

so practically she is only paying 2000 times 70% (if her tax bracket is 30%).

but there are downsides as well, I am illustrating worst scenario:

I assume ur sister is on ARM instead of FIXED rate.

Lets say that inflation is out of control, so interest rates go up.. so ur monthly payments go up. Let say that she makes enough money to pay for this higher monthly payment, but I am betting that other people with interest only loans DONT make enough to cover this.

So houses go into foreclosure, then the market is flooded with CHEAP houses since bank sells foreclosed houses for cheap, BOOM, the value of your sister's house just depreciated.. so now you have the same loan to pay off, while the value of your house is actually LESS

 

[rahvin]

Originally posted by: FlyLice

Originally posted by: bolido2000
My sister was telling me that her friend bought a $400K house and she financed the whole amount (no downpayment). The interest rate is around 4% locked for 4 years and she pays $2000 dollars every month, which covers ONLY the interests. She plans to keep the house and sell it in 4 years assuming the value will go up (this is SoCal, so it is very likely) and pocket the difference. Commom sense tells me that when all you can pay every month is just the interest it is not a good deal, but at the same time it seems wiser than just renting. Comments?

Better off in vegas.

BUT, in the history of the real estate market, housing prices (aggregate across the US) have NEVER gone down.

BUT, condo prices HAVE gone down, especially when interest rates rose, and that is a very risky investment.

AND, when interest rates go up, she is FVCKED.

Good luck to her.

Regional markets have declined. There are some areas of the US where 30 year Real Estate prices are down 2% over the 30 years. And california has been through one real estate bubble already, it was primarily commerical but it could very easily extend into the residential market.