Which mortgage is best for me- 7 year interest only or 30 year fixed? First home (condo) - read details.?

Question

I'm about to buy my first home (condo) and do not plan on living there more than 7 years. I decided to buy because I'm sick and tired of throwing money away renting.

I have narrowed my loan choices down to either a 30 year fixed and a 7 year interest only. The 7 year interest only mortgage is $120 less per month than the 30 year fixed, which is a lot of money for me.

I am also aware that I'd be able to write off a greater amount in taxes by going with the interest only mortgage, yet most people are still advising me to go with the 30 year fixed instead.

Please help.

Thanks

Answer 1

Basically if you go with the interest-only, you are still throwing away your money each month because you aren't building any equity. I know they say that you can pay extra toward equity, blah-blah-blah - but, trust me - you find other places to spend it.

Go with the 30 - in 7 years, you'll thank me!

Answer 2

If you aren't planning to be there for more than 7 years, I wouldn't go with the 30 year fixed. You'll be wasting money and losing writeoffs.
I'd consider one of these 2 options:
1. Balloon Mortgage ( this could be a variant of your 7 yr. int. only)
Features:
Principal and interest payment remain constant for the term of a balloon mortgage which is usually 5-7 years, although principal and interest are amortized over 30 years.
Benefit:
At the end of the 5-7 years, you can pay off the mortgage or apply to refinance.
Advantages:
Balloon mortgages are typically offered at lower interest rates than other fixed rate products, making them more affordable.
If you know you'll be in your home for less than the term of the mortgage, this may be the product you should consider.

2. Home Loan Payment Relief (HLPR) Mortgage
Feature:
A three-year adjustable rate mortgage at one percentage point below the national average for such loans.
After three years, the rate will adjust annually to market rates, with rate adjustments capped at 1% per year, and 5% over the life of the loan.
Benefit:
At the end of the 5-7 years, you can pay off the mortgage or apply to refinance.
Advantages:
Enjoy home ownership sooner.
Save money with an affordable rate.

One thing also to bear in mind...depending on where you live, condos can often be a harder sell than houses. Be prepared for the possibility of having to pay 2 home payments for a short time.

Hope this helped a little.

Answer 3

Most important difference: With Interest only mortgage after those 7 years of paying when you are ready to sell condo you will not have any equity in your house. Remember, you are planning to pay only interest to the Financial Institution which means they are still the "owners" of the whole equity when you're ready to sell. It's kind of like renting the house again only for more money.

I would suggest to go and try to find regular mortgage 30 year fixed - it's safe (% will not change) and every month you're paying off a little bit of your equity which you will need once you decide to sell it.
I understand it's more money to pay but in the future (after those 7 years) it will payoff with a big money.
And with the tax write-off:it's not going to change a lot.

Answer 4

That depends on your loan to value. If your house is worth $100,000 and you take out a $75,000 mortgage, on an interest only you're only paying on interest, nothing towards the principle unless you make extra payments. Therefor when you go to sell your house you will not only owe the full balance of $75,000 but all the unpaid interest. Interest only loans can be trouble, your best bet is to go with the fixed. It's cheaper in the long run!

Answer 5

I'd suggest the 30 year fixed, unless you can get a variable rate mortgage.

Interest only mortgages don't make much sense. You never pay down the principle amount and gain equity in you home.

Answer 6

If you are pretty sure that you are going to be in your condo for 7 years or less. i would go with a 7 year interest only. The interest rate will probably be lower, and even though you don't acummulate any equity, most likely the property will accrue in value when you decide to sell the property.

Answer 7

Interest only should be illegal. If all you're paying is the interest and nothing off the principal then you never acrue equity. After twenty years you still don't own any percentage of the house. Most interest only loans have a balloon payment on the end and guess how much it is. The face value of the original loan. after paying all the interest you still have to buy the house.

Answer 8

You pose a great question. If you do not intend to occupy the property then I would recommend an ARM. There are 3yr, 5 yr, and 7 yr ARMS available. There has been a lot of bad press about the ARMS lately. But those are geared more towards borrowers that intend to stay in the property over a long period of time. I do recommend the ARM for your situation. Please contact me if you have any other questions or concerns. I would be more then pleased to help.

Antonia
Loan Consultant
Gordon Lending Corp.

Answer 9

NOTE: IF YOU WANT THE CRITICAL FACTS ABOUT INTEREST-ONLY WITHOUT ANY FRILLS, GO TO THE INTEREST-ONLY TUTORIAL.

April 8, 2003

I continue to be dumbfounded by the claims about interest-only loans reported to me by mortgage shoppers. Whether the claims originate with loan officers or, as one defensive loan officer suggested to me, they arise in the over-active imagination of shoppers who still believe in the tooth fairy, I can’t say for sure. Probably it is some combination of the two. All I know for sure is that misperceptions abound, and I keep running into more of them.

Misperception 1: Interest-only loans are a type of mortgage. They are not. Interest-only is an option that can be attached to any type of mortgage.

For example, a 30-year fixed rate mortgage of $100,000 at 6% has a monthly payment of $599.56. This is the fully amortizing payment -- the payment which, if maintained over the full term of the loan, will just pay it off.

In month 1, that payment divides into $500 of interest and $99.56 of principal. In month 2, the payment remains at $599.56 but the breakdown is $499.50 and $100.06. Each month, the interest portion declines and the principal portion rises. After 5 years the balance is $93,054. That is how mortgages amortize.

Now lets attach an interest-only option to this mortgage, available, say, for the first 5 years. That means that the borrower need pay only $500 a month during the first 5 years. There is no payment to principal.

If the borrower exercises the option, therefore, the balance after 5 years is $100,000. There is no amortization. Beginning year 6, the borrower must begin paying $644.31. That is the fully amortizing payment for a 6% loan of $100,000 for 25 years.

Misperception 2: It is less costly to amortize an interest-only loan. This is patently ridiculous, but some variant of it keeps popping up in my mail.

Suppose a borrower takes the mortgage described above with the interest-only option, but decides to pay $599.56. He doesn’t exercise the option but makes the fully amortizing payment instead. Then the loan will amortize just as it would have if the interest-only option had not been attached. After 5 years, the balance will be $93,054. If you make the same payment on the same mortgage, you end up in the same place.

If the borrower pays $700 a month instead of $599.56 on the same mortgage, the balance after 5 years will be $86,046. Whether the mortgage did nor did not have an interest-only option will matter not a whit.

Misperception 3. An interest-only loan carries a lower interest rate. Lenders might charge a higher rate for a loan with an interest-only option, because the risk of default is a little higher on loans that amortize more slowly. But a lower rate would be irrational.

The notion that interest-only loans have lower rates arises from comparisons of apples versus oranges. Adjustable rate mortgages (ARMs) with an interest-only option have lower rates than fixed-rate mortgages (FRMs) without an option. But an ARM with the option does not have a lower rate than the identical ARM without it.

Since the interest-only option is available on both FRMs and ARMs, it is pointless to be sucked into an ARM because of that feature. First choose whether or not you want an ARM or an FRM. This decision should be based on how long you intend to have the mortgage, and on your willingness to accept the risk of a future increase in the interest rate in order to have a lower rate in the short-term. If you opt for an ARM, then select the other ARM features you want, including an interest-only option.

Misperception 4. On an ARM with an interest-only option, the quoted interest rate is fixed for the interest-only period. This might or might not be the case. Where it is not the case, this may be the most dangerous misperception of all because it can induce borrowers to take ARMs that don’t meet their needs.

The interest-only period is the period during which you are allowed to pay interest only. The period for which the initial rate holds is a different matter altogether. On an ARM with a very low rate, the interest-only period is always longer than the initial rate period.

A common ARM today has an interest-only option for 10 years, but the initial rate holds only for 6 months. On a $100,000 loan with an initial rate of 4%, the interest-only payment is $333. If the rate after 6 months goes to 6%, the interest-only payment would jump to $500. Borrowers who thought they were safe for 10 years would get a rude awakening.

November 20, 2003 Postscript

Misperception 5. Interest-only loans are appropriate if you don't expect to be in the house very long. I don't know where this idea comes from, but it makes no sense. If you don't expect to have the mortgage very long it makes sense to select an ARM because the rate will be lower, and it makes sense to avoid paying points because there won't be much time to recover your investment through a lower rate. But the decision to take an interest-only should not be affected by your time horizon.

February 10, 2004 Postscript

Misperception 6. Interest-only loans don't require PMI. Some loan officers are shameless in the stories they tell borrowers, and this is another one. Of course, some interest-only loans don't require PMI because the loan is too large relative to the borrower's equity, or the deal is otherwise sub-prime. In these cases, the borrower is paying the insurance in the interest rate.

If there is a loan that requires PMI but does not require it if the loan has an interest-only option attached, it would be because the insurer doesn't want the greater risk entailed by the PMI. In such case, the implicit insurance premium in the rate is bound to be larger than the PMI premium.

Copyright Jack Guttentag 2004

Answer 10

relies upon on the activity fee, which determines how briskly you aquire fairness (as hostile to paying activity) on your residence. you'll likely personal between 5% and 10% of the fee of the residence (plus appreciation), reckoning on your activity fee, after 7 years. in case you assume an possession of seven.5%, that could be $7,500. on the different hand, in case you placed $one hundred and twenty in a jar each month, you'll have $10,080 on the end of seven years. in accordance to some quick calculations, the wreck aspect looks about 4.4% activity - in case you will get that fee or decrease (good success!) you'd be extra efficient off with the 30 3 hundred and sixty 5 days loan. in the different case pass with the 7 3 hundred and sixty 5 days, yet note that until eventually the residence fee will advance you'll income no fairness and could truly be paying lease to the monetary company. 2 words of caution! One, if the fee of your residence decreases, you've to conceal the version between the sales cost and the loan payoff your self. 2, do not assume being waiting to promote the residence on the instantaneous once you want to. If the residence market is depressed once you attempt to flow, it would want to take months to promote.