Interest Only Mortgages...

[cpals]

I'm trying to figure out a way to afford a house on my income currently and a few people have suggested an interest only loan. Since I'm young and in a stable job currently, I'm hoping that I will be making more money in 3-5 years, but it's still an unknown.

Does anyone have experience with these types of loans and are they 'too good to be true'?

Thanks.

Edit:

Great discussion.. thanks!

BTW, I live in SW Florida.

 

[Cattlegod]

dude, you might want to be careful. the housing market is not going to go up much in the next 5 years and interest rates are on the climb. best bet now is to lock in on a fixed 30 year IMHO. This means in 5 years the interest rate baloons up to a very increased rate (ppl usually move and refi on a diff house) but the rates may be so high and the home values so low that it won't be worth it. IMHO the best bet is to buy in the next 1-2 years.

if you can't swing it, get a smaller house.

 

[cpals]

I can't even swing getting a smaller house, but there was already a topic on that.

I was thinking about just renting for a year or so and save up as much as I could for a downpayment and then go house shopping.

 

[Cattlegod]

Originally posted by: cpals
I can't even swing getting a smaller house, but there was already a topic on that.

I was thinking about just renting for a year or so and save up as much as I could for a downpayment and then go house shopping.

that is exactly what i'm doing.

i have ~15k saved up right now. i might go on travel for work and be able to bank another 30k or so over the next year due to not having to pay for rent and what not. If I can swing travel for 2 years I will have a nice downpayment on a house.

 

[DaveSimmons]

It's late so I'm probably spouting the blindingly obvious, but regardless spout I will:

Don't buy a house that you can't afford thinking it's an investment, you're much better off renting and saving.

Like Cattlegod said ARMs are dangerous with rates expected to go up not down. You also shouldn't count on growth in value to save you from an interest-only loan, many markets will be stagnant.

Be sure you have several months worth of living expenses saved in addition to the down payment, think of what would happen if you changed jobs and couldn't afford the mortgage payments.

But trust me about the sunscreen.

 

[saymyname]

Just remember that Japan had 40% to 80% corrections when their housing market went crazy. As a kid I saw 40% corrections in L.A. It wouldn't suprise me if it happened again.

Florida is the last real estate market to go through a boom. Nevada and Arizona are having a big correction as we speak.

I'm seriously contemplating waiting. Then again, I only have to have a 7% apprecation rate to make it worth buying over renting so I am always second guessing myself.

 

[Evadman]

Originally posted by: saymyname
Florida is the last real estate market to go through a boom. Nevada and Arizona are having a big correction as we speak.

what is a 'correction'?

 

[everman]

Originally posted by: Evadman

Originally posted by: saymyname
Florida is the last real estate market to go through a boom. Nevada and Arizona are having a big correction as we speak.

what is a 'correction'?

It's what brokers and analysts mean when the sh!t hits the fan.

 

[habib89]

Originally posted by: everman

Originally posted by: Evadman

Originally posted by: saymyname
Florida is the last real estate market to go through a boom. Nevada and Arizona are having a big correction as we speak.

what is a 'correction'?

It's what brokers and analysts mean when the sh!t hits the fan.

so that means prices are gonna drop?

 

[T9D]

The best thing you can do is get into something, anything as soon as you can.

You can wait and save. But then by the time you saved money the house has gone up that much or more so it was kind of pointless. Or you can wait until you make more money but by then if the house goes up more then it will cost you higher payment anyway. So again it could be a wash. But if you buy now you are locked in. If you make more later you can have enough to pay on the interest. And later on you'll also have equity in your house. And you cant beat how grounded and the secure feeling of owning your own home. Choose a house wisely and just make sure you can handle the payments and you really cant lose. Even if ithe market slumps it always goes back up eventually. If you are holding onto the house it really doesnt matter anyway.

 

[DaveSimmons]

Or go to vanguard.com and buy some VFINX instead

You can't beat the secure feeling of knowing you have no huge monthly payment to make, and that your investments aren't all tied to the place you live.

Having a portfolio of mutual funds and renting can be a better investment if you have the discipline to save the difference between rent and a mortgage payment instead of blowing it all on booze and hookers

 

[bob4432]

Originally posted by: saymyname
...Arizona are having a big correction as we speak.

i can vouch for that but the builders keep building like crazy, although house prices are still high, this is not a good time to buy imo in AZ. we bought about 2 or 3yrs ago before it went nutz and our condo easily doubled in value (still holding its value, excellent zip code). i would expect the prices to start coming down as they are still insane around the outer parts of the valley, like 35MI away from downtown phx.

personally i wouldn't do an interest only loan, bad idea. save up more and wait until you can get locked in at a decent rate, not a arm as they are a bad idea now too.

 

[HomeAppraiser]

NO!

 

[dxkj]

Live out of your car

 

[compuwiz1]

I would not advise and interest only, or an arm, if you're in California. People are gonna be walking away from their houses right and left, due to the correction.

 

[Kyteland]

Originally posted by: DaveSimmons
Having a portfolio of mutual funds and renting can be a better investment if you have the discipline to save the difference between rent and a mortgage payment instead of blowing it all on booze and hookers

You're no fun.

 

[b0mbrman]

Originally posted by: cpals
I'm trying to figure out a way to afford a house on my income currently and a few people have suggested an interest only loan. Since I'm young and in a stable job currently, I'm hoping that I will be making more money in 3-5 years, but it's still an unknown.

Does anyone have experience with these types of loans and are they 'too good to be true'?

Thanks.

It all depends on your discipline.

If it leads you to buy more house than you should be able to afford, then bad idea.

If you spend the money you don't put toward your mortgage on booze and dirty, dirty women, then bad idea...

If you invest the money in securities with a higher yield than your mortgage's effective interest rate then good idea...

 

[saymyname]

Originally posted by: tk109
The best thing you can do is get into something, anything as soon as you can.

You can wait and save. But then by the time you saved money the house has gone up that much or more so it was kind of pointless. Or you can wait until you make more money but by then if the house goes up more then it will cost you higher payment anyway. So again it could be a wash. But if you buy now you are locked in. If you make more later you can have enough to pay on the interest. And later on you'll also have equity in your house. And you cant beat how grounded and the secure feeling of owning your own home. Choose a house wisely and just make sure you can handle the payments and you really cant lose. Even if ithe market slumps it always goes back up eventually. If you are holding onto the house it really doesnt matter anyway.

This logic is what is killing me. "buy anything as soon as possible", but "buy a house wisely"

I'm just not sure if buying a house now is a great idea when prices are dropping. Instead of rising 25% this year they've dropped 3%. Prices can't rise indefinitely just like the stock market couldn't during the tech boom. Once the stock bubble burst people said that could never happen again and moved thier money into real estate doing the exact same thing. As if that wasn't bad enough you saw it rinse and repeat with Google and other tech stocks.

 

[iamwiz82]

Originally posted by: compuwiz1
I would not advise and interest only, or an arm, if you're in California. People are gonna be walking away from their houses right and left, due to the correction.

The 40 year Interest Only ARMs scare the hell out of me. i cnanot believe people are doing stuff like that. I have already heard that people are dumping their houses because the Interest Only portion of their loan is over.

 

[jhayx7]

Well, if the OP is only going to stay in the house less than 5, 7 or 10 years; then an ARM would be better than a fixed. The rate is a little better and if he is moving out before the 5-10 year AR is up, he should save a little money over the fixed rate.

 

[dullard]

They are not too good to be true. Why? Because there is no good in them to begin with.

Run far, far away from that idea.

Have you actually sat down and done the math? I know you may or may not like math, but honestly have you done it? What I mean is that you need to answer these questions for yourself (you don't have to post them).

1) What can I honestly afford now?
2) What is the mortgage amount now?
3) How much extra will the house cost above and beyond the mortgage? Think repairs, furniture, remodeling, lawn mower, etc.
4) Does (#2 + #3) exceed #1?

5) How much will my salary be in five years?
6) Will my salary be able to hande the mortgage in five years? Without details of interest only loans you are looking at, I can only assume the mortgage payments will approximately double. A $1500/month payment will be nearly $3000/month.

7) Honestly, how long would you live in the house? Typically, people live in their first house for about five years.

 

[GasX]

I have an interest only mortgage, but I wouldn't recommened it to most people.

I bought my house at a discount to the market price
My down payment was almost 50%
I make regular payments on the principal
I have substantial other assets to fall back on in an emergency.

 

[Miramonti]

Interest only loans are best in you only have interest in a house, but don't actually buy it.

 

[azoomee]

Avoid the interest only loan -- its a good way to get yourself into alot of trouble during this current market.....rising rates, and potentially stagnant or decreasing housing market.

 

[AnyMal]

The ONLY instance to consider interest-only mortgage if you're buying an investment property. For instance, you got lucky on a HUD foreclosure that you bought 20% + below market. HUD has residency requirement of 6 moths before you can resell the property. In that case, interest-only makes sense.