should i go interest only or should i go interest and principal

[Clocker]

interest only is at 5.875


and the principal plus interest is at 5.625


so what should i do. i would really like to sell the house in 3 years if the market gets better.

 

[Greenman]

The only time to do an interest only loan is if you're in a hot market and plan on selling soon.

 

[bctbct]

I dont see any reason to do an interest only mortage unless you cant afford the payment.

If you plan on selling in 3 years you are better off with a 15 year note, if you dont chances are you will have to pay out of pocket when you sell unless of course the house appreciates above norm.

 

[spidey07]

Like playing russian roulette? Go interest only.

In other words control the things you can like LOCATION, LOCATION, LOCATION.

 

[Kelemvor]

Interest only is pretty much a bad idea any time unless you are just going through slow times and will be getting more money eventually. If you pay interest only, you never come any closer to owning the house sinc eyou're never paying on the principal.

 

[compuwiz1]

Interest only sank a lot of ships here in CA.

 

[jagec]

Originally posted by: bctbct
I dont see any reason to do an interest only mortage unless you cant afford the payment.

...in which case you should buy a cheaper house.

Then again, apparently the government bails out people who make dumb homebuying decisions...so maybe interest-only is the way to go now.

 

[Matthias99]

Originally posted by: Kelemvor
Interest only is pretty much a bad idea any time unless you are just going through slow times and will be getting more money eventually. If you pay interest only, you never come any closer to owning the house sinc eyou're never paying on the principal.

I would not get the interest-only loan unless you are capable of actually paying it down on your income. Counting on appreciation (and/or being able to sell it easily in a few years' time) to save your ass is a really, really bad plan. That's one of the contributing factors to that whole subprime mortgage meltdown that's going on (and may get worse.)

But if you could pay interest+principal, and your plan is to flip the house, the interest-only loan will save you some cash in the short term. Just leave yourself enough financial slack that you can make principal payments too in case things don't go smoothly. And of course you run the risk of higher interest rates hurting you, but if you can't qualify for a 15/30-year fixed or you don't have 10+% to pay upfront...

 

[Clocker]

well i am paying 20 percent to avoid Private Mortgage Insurance. i have money but i am thinking i might rather invest the difference i get from an interest only option. also, i paid 80k less than what housing are selling in the area. so the decision is pretty tough.

 

[FoBoT]

don't you read the news? the housing market is bombing because people are buying too much house with bad mortgages like interest only

buy less house with a normal mortgage so you don't get foreclosed next year

 

[sdifox]

Call me stupid, but if you are paying interest only, why don't you just ffing rent? At least you don't have this huge liability.

 

[RaiderJ]

You could take the extra money that you would normally spend on interest + principal and put it in a interest-bearing account. That you could actually get a yearly return on your investment, and have your money in a liquid form (unlike home equity).

You could always refinance down the road if you decide to keep the place.

 

[dullard]

Lets try putting numbers here.

Assume because you are in CA, it is a $300k house.
Assume they are 30 year mortgages.
Assume you sell after 3 years, and you get $300k when you sell + enough money to cover your selling fees.
Assume your investments net you 8% return each year.
Assume we can ignore closing costs, taxes, and other stuff that are the same with both mortgages.
Assume those interest rates you posted are fixed for the full 3 years.

Interest only: $1468.75/month
With Principal: $1726.97/month
Net difference: $258.22/month

Interest only: You paid $52,875 to the house. You sell the house and get $0 profit. Also you paid your investments $9295.92 which are now worth $10795.09. Net loss: $52,875 + $9295.92 - $10795.09 = $51,375.83 lost by buying that house.

With Principal: You paid $62,170.89 to the house. You sell and get the $12,545.34 you had in equity in the house. Net loss: $62,170.89 - $12,545.34 = $49,625.55 lost by buying that house.

You are $1750.27 better off to pay the principal than to get an 8% return on your investments. And that investment was a gamble. What if you get less than 8% return? Note: I did ignore the income tax deduction differences between the two (interest varies, so your income tax will vary). But I also ignored the fact that you may have to pay tax on your investment returns. The two are minor and will approximately cancel out.

How about i make it more clear? You'd need a 17.49% return (yearly) on those investments to break even with paying the principal. If you think can guarantee that you'd get that return, let me know, as I have a bridge to sell you.

 

[Vic]

It depends. Are you the kind who pays extra on your credit cards or car payments, or do you just pay the minimum? If you're the former, you'll likely enjoy the flexibility of the interest-only. If you're the latter, then you'll need the discipline of the fully amortized.

 

[mugs]

My understanding is that the housing market has cooled in CA, so I wouldn't buy a house at all if you'd sell it in only 3 years. You'll end up in the red with either loan.

I have a really good spreadsheet that breaks down all of the costs of renting vs buying, but I can't find it. Long story short, with such a short time for your house to appreciate, the costs associated with buying and selling it are going to wipe out any equity you build up and then some. You'll end up putting your house up FSBO to try to save money. Have fun.

 

[Rob9874]

Originally posted by: RaiderJ
You could take the extra money that you would normally spend on interest + principal and put it in a interest-bearing account. That you could actually get a yearly return on your investment, and have your money in a liquid form (unlike home equity).

This is the only smart post in this thread. I see no reason to put money towards the principle of the house, unless you plan on paying it off, or you have no discipline to put the money somewhere that earns interest, or pay off a debt that you're paying interest.

Think about it: You buy a home for $200,000. The money you put towards principle makes NO interest. If you pay $25,000 towards principle, you get $25,000 back when you sell it. Why not put that money under your mattress? Any money you make when the house appreciates, you will get regardless of whether you contributed towards principle or not.

I know, the argument for paying towards principle is if the house depreciates. Well, if your $200,000 house only sells for $175,000, you lost $25,000, regardless of whether or not you put money towards the principle or not. Sure, it's easier to pay off when you sell it for $175,000 if you only owe $175,000 (because you paid $25,000 towards principle), but you still lost the $25,000! Why not put that $25,000 in an interest-bearing account? Then, when you lose the $25k to depreciation, you at least have the interest it made.

Cliffs: Money put towards the principle of a home makes NO interest!

 

[mugs]

Originally posted by: Rob9874

Originally posted by: RaiderJ
You could take the extra money that you would normally spend on interest + principal and put it in a interest-bearing account. That you could actually get a yearly return on your investment, and have your money in a liquid form (unlike home equity).

This is the only smart post in this thread.

Did you read the post after that one?

 

[dullard]

Originally posted by: Rob9874
Think about it: You buy a home for $200,000. The money you put towards principle makes NO interest. If you pay $25,000 towards principle, you get $25,000 back when you sell it. Why not put that money under your mattress? Any money you make when the house appreciates, you will get regardless of whether you contributed towards principle or not.
...
Cliffs: Money put towards the principle of a home makes NO interest!

The bolded parts are completely false. In this case, the money nets a GUARANTEED 5.625% interest rate if he takes the mortgage with principal payments. Saving money (paying less mortgage interest) is basically the same thing as earning money (earning interest in some investment). Well, actually, you don't pay taxes on saved money, so you can be even better off than the 5.625% return.

Look at my example for a reason you want to pay principal. The 5.625% interest (saved) is better than most investments. Plus, you save money by getting a lower interest rate. Two forms of guaranteed saving money is better than one risky form of earning money in this case.

 

[torpid]

It doesn't matter whether the money you are putting towards principal is EARNING interest, it is reducing interest against you, which is effectively the same as earning interest.

 

[b0mbrman]

Originally posted by: Greenman
The only time to do an interest only loan is if you're in a hot market and plan on selling soon.

Why?

A house is an appreciating asset and the amount you've effectively got invested is the equity you have tied up. Last I checked, a the inverse of lower equity is a greater return :roll:

However, the OP's lower interest rate for +principal complicates things. I'd go with that.

 

[Rob9874]

Originally posted by: mugs

Originally posted by: Rob9874

Originally posted by: RaiderJ
You could take the extra money that you would normally spend on interest + principal and put it in a interest-bearing account. That you could actually get a yearly return on your investment, and have your money in a liquid form (unlike home equity).

This is the only smart post in this thread.

Did you read the post after that one?

Yes, but that's dumb because it was based on the OP of a better interest rate on "interest + principle". If that's not a typo, then yes, he obviously needs to do that. In my experience, interest-only loans have the better interest rate, and money paid towards equity would not be greater than the money invested during that time.

 

[LegendKiller]

Forget which is better....


Why the hell is anybody buying short-term houses in a market that is tanking?

If you do this, I have some great stock to sell you. It's called New Century and is a sure bet.

 

[Rob9874]

Originally posted by: dullard

Originally posted by: Rob9874
Think about it: You buy a home for $200,000. The money you put towards principle makes NO interest. If you pay $25,000 towards principle, you get $25,000 back when you sell it. Why not put that money under your mattress? Any money you make when the house appreciates, you will get regardless of whether you contributed towards principle or not.
...
Cliffs: Money put towards the principle of a home makes NO interest!

The bolded parts are completely false. In this case, the money nets a GUARANTEED 5.625% interest rate if he takes the mortgage with principal payments. Saving money (paying less mortgage interest) is basically the same thing as earning money (earning interest in some investment).

Explain this to me. I'm willing to admit mistake, but I don't understand this one. How is the money he pays towards equity guaranteed to make 5.625%?

 

[GasX]

More opinions than facts in this thread, but based on what you have said, I would go with the traditional mortgage. Aside from speculating in a hot real estatemarket, interest only loans are not usually a good idea for most people.

I say this as a holder of an interest only loan - variable rate to boot!

However, I have actually paid off more of my mortgage in lump sum payments already than I would have with regular mortgage payments. My wife and I had semi variable incomes, so keeping our regular monthly payments as low as possible was a good idea for us. Tossing big chunks of bonuses into principal was part of the plan. We also put WAY more than 20% down and have a very healthy reserve of cash to fall back on if circumstances change.

the moral of my story is "meet your sales goals kids! "

 

[dullard]

Originally posted by: Rob9874
Explain this to me. I'm willing to admit mistake, but I don't understand this one. How is the money he pays towards equity guaranteed to make 5.625%?

Lets try a different example (same concept).

Suppose you have a $20,000 CC balance that charges you 19% interest.
Suppose you find a great investment opportunity that will net you 14% interest.
Suppose you have $10,000 in cash at your disposal.
Suppose you have only two choices, pay the CC or invest in that opportunity (lets not get cute and pretend we can switch to a different CC because you can't switch mortgages for free or that easilly).

Where does your $10,000 go? I'll take the smart route and pay the CC bill. By saving 19%, I'm better off than earning 14%. Saving money is basically the same as earning money.

Same goes with the house. By paying principal, the bank charges you LESS interest next month and for every month for as long as you have that mortgage. You save the 5.625% interest that the bank would have charged you. And that savings is compounded monthly.