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NET 5 loan?

SagaLore

Elite Member
Dec 18, 2001
24,036
20
81
So I'm doing a loan comparison...

And I see that a NET 5 loan has one of the lowest interest rates. Plus, for the first 5 years you pay directly on the interest. After 5 years, its just like an ARM loan - the interest is changed annually and you pay on both the principle and interest.

So... how do I use this to my advantage? I would think the trick is to pay more than the monthly payment, which I think would cover principle, so after 5 years the new payment is actually much lower than it would have been.

The risk is not knowing what interest rates will be like 5 years from now. Any guesses? Would this be a bad idea for a mortgage right now?
 

IronWing

No Lifer
Jul 20, 2001
62,110
15,348
136
I can't think of a scenario in the near term where this would be anything but a financial catastrophe. If you plan to sell the house before the 5 years is up, it might make sense in a rising market. However, housing prices are expected to continue to decline for some time so when the five years are up, selling would likely leave you having to pony up big bucks to get out of the loan. Somewhere in the next five years, interests rates are going to have to rise to choke out rising inflation so you can expect interest rates to be higher then than now. Given the relatively low rates on fixed loans available today, I would go with a fixed rate mortgage.


Edit: Another reason not to go with this mortgage: If rates are indeed higher at the end of the five years and you have paid only interest so you have no equity, then you will find it difficult to get a different mortgage at that time. Basically you will be sitting where the sub-prime folks are right now.
 

alkemyst

No Lifer
Feb 13, 2001
83,967
16
81
yeah they are hedging that a house bought today may be worth less in 5 years or break even. Also most people tend to think they will pay extra principal but in reality do not.

I don't know any responsible person that would go for something like this unless it was their only option and they had to have they house.

What is the rate savings you are looking at? Fixed rate loans are at historical lows.
 

Double Trouble

Elite Member
Oct 9, 1999
9,273
103
106
Basically, that's a terrible terrible idea. You're going to end up upside down in 5 years, unable to refi. After that the rates will quickly climb and you'll be screwed.
 

alkemyst

No Lifer
Feb 13, 2001
83,967
16
81
If he pays more than the interest, he really shouldn't be upside down...if he is then our future is bleak. Refi'ing is really just a matter of credit and cash on hand.

 

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