Buying a house and only paying interest every month

[FlyLice]

Originally posted by: 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.

"(aggregate across the US)"

Anyways, the OP talks about a condo, which has crashed before.

 

[centexbnkr]

Probably not a bad idea. Look at the stock market over the last five years and then look at real estate prices. Real estate has been a more stable investment. In SF, it's likely he will get back what he puts in given the real estate market in that area (based on discussions I have had with co-workers that live in the area). In a stable economic environment, real estate is a good investment choice with lower risk than investing in stocks or bonds. Homes sales nationwide remain strong even in a rising interest rate environment. The economy has improved and is now growing. I am not up to date on the current economic conditions in SF, but I would be willing to bet that its also on an improving trend.

Based on a simple interest loan, it looks like taxes/insurance are included in the payment ($400,000 x .04 = $1,333 per month). A 4% fourty year mortgage with $667 in taxes/insurance would be close to $2,600. With little or no downpayment, he would be paying mortgage insurance on top of that. So it's costing him less to live there than if it was amortizing. Plus, as a previous poster mentioned, the first five years of a mortgage are mostly interest anyway. Your equity comes from appreciation. I can say that 75% of the equity in my home is from value appreciation rather than principal reduction. If you can't afford the additional $600+ in payments, it's a good way to get into a desirable piece of real estate within your budget. Otherwise, he still can invest that $600 and make use of the interest tax benefit.

Any smart investor will tell you to use someone else's money to make money. If real estate values increase by more than 4% per year on average during that time, then he has at least broke even. OFEO appreciation rates (http://www.ofheo.gov click on House Price Index) show that California as a whole has had at least 10% appreciation rates over the last five years. I am sure parts of the state have done better or worse, but he is looking at a net gain of at least 6% per year if the trend continues - with no upfront investment. Factor in the tax savings, and he is probably looking at 8-10% minimum. That's a pretty safe bet in my mind. Especially when the state had a 27% House Price Index appreciation in 2004

Then, he could be wrong and lose his shirt. But, that's the risk you take in making any investment.

 

[vi edit]

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.

I don't know if it's state or federal law, but the interest rate on an ARM can't go up any more than 1% a year.

I went into an ARM knowing full well that I would be out of the house by the time my 7 year variable went up. Even if I did stick around an extra year or two, my 5.2% ARM wouldn't go up to any more than 7.2% by the time I was out.

ARM's aren't magically going to shoot from 5% to 20% in one year. You have time to either refinance or sell out.

 

[KoolAidKid]

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).

I think that there might be a misunderstanding here about how interest-only loans work. You usually make interest-only payments for a set period of time (probably 4 years in this case). At that point your payment adjusts and the principal is amortized over the remaining 26 years of the loan. In other words, she will start paying down her principal after year 4 rather than earlier. This is not a big deal IMO, as you hardly pay down any of your principal during the first 4 years of a more traditional loan anyway.