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) for $135,000 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

The amount of interest you pay on an Interest only will only slightly differ from the amount of interest you pay in a 30 year. So your tax break won't be a substantial difference. In this market, which is pretty unknown at the moment, not gaining equity in the house would be scary. You possibly won't make any money in the long run.

Try looking into a 5 year fixed that switches to an adjustable. The payments will be slightly lower than a 30 year as you can usually get a little lower rate.

Your other option is getting the 7 year interest only and making additional payments to the principal. Treat it as a 30 year, that way when you CAN make additional payments you can and when you can't, you don't HAVE to.

There usually isn't a balloon payment at the end of the interest only period, but your regular payments will be higher than normal because you'd have 7 years of principal you didn't pay to make up for and rolled into the payments.


There are a ton of sites that can give you an amortization schedule. Run some numbers, such as the interest only rate and the 30 year, and also if you were to make additional principal payments to both. You do have a lot of options and making your loan agent work for it is what they're there for.

Prepayment penalties, which usually accompany Interest only loans, (beyond paying off and/or selling) uaually only qualify if you pay more than 20% of your original loan amount in any 12 month period, so extra payments shouldn't affect it.

REMEMBER there are always other loan brokers out there if the one you're using isn't getting you what you want! Shop around!

Good luck!! :)

Answer 2

Depends on the interest rate, which determines how fast you aquire equity (as opposed to paying interest) on your condo. You would probably own between 5% and 10% of the value of the condo (plus appreciation), depending on your interest rate, after 7 years. If you assume an ownership of 7.5%, that would be $7,500.

On the other hand, if you put $120 in a jar every month, you would have $10,080 at the end of seven years.

Based on some quick calculations, the break point seems to be about 4.4% interest - if you can get that rate or lower (good luck!) you would be better off with the 30 year mortgage. Otherwise go with the 7 year, but be aware that unless the condo value increases you will gain no equity and will essentially be paying rent to the bank.

Two words of warning!
One, if the value of your condo decreases, you will have to cover the difference between the sales price and the mortgage payoff yourself.
Two, don't count on being able to sell the condo immediately when you want to. If the condo market is depressed when you're trying to move, it could take months to sell.

Answer 3

Hi - I read some of the feedback, If you go with a 5 yr fixed- and switch to an adjustable - (not knowing what the rates will be in 5 years - may hurt you). If you have awsome credit - the rates are still in the 6's - if your credit is middle of the road - rate's will be higher...you could check into a 10 yr fixed I/O - over a 30 yr period, and the rate is fixed ...no prepayment - on the conforming side thru National City, and others - (I am a Broker for over 150 companys). Also, if you shop around - use your credit = or go with a broker - so he can submitt it to a Lender using his credit - so it does not pull your score down - It is considered a soft pull, but you still do not want to take the chance of 5-10 companys re-pulling your credit.

What you turn in at tax time is the 1099 INT form - it show the amount of interest you paid for the year....On this loan amount the first year, there will not be much of a difference going interest only vs. fixed rate - You may change your mind and want to stay there, in that case - why not get a fixed rate - and when you sell your home, you will have money back - (think of it as a savings account, money that you don't see going out of your paycheck). The money back - will help you for a downpayment on another home in the future, or for a vacation - children - etc - etc. Sounds like you have thought this out - carefully - As an example, I bought my home in 1992, the rate is 6.25 fixed - I did not intend in staying here for more than 5 years, and I am still in the same home - so glad I got the fixed rate - with out refinancing and taking a hit on a higher interest rate......Too many ppl are in and adjustable rate now - and the rate is going up, and they are having problems with getting the value out of their home to get out of the adjustable rate. I have been in the business 6 years, and have see it all - Good Luck to you - Check out the mortgage calculator on my web site - or use one that others had listed in their feedback. Good Luck

Answer 4

If you are tired of renting, then you must want to get value for the money you spend on your shelter. If you get an interest only loan, you will still not be getting value on the money you spend unless the property appreciates, not much better than renting.

You'd be surprised how much equity you can manage in 7 years if you just pay an extra 50 dollars of principal in the first year and increase that extra by 50 dollars the next year, so you are paying a hundred more in additional principal. Using this method I've got almost $7,000 in equity in 2.5 years.

At least that way when you do leave in 7 years you can get something out of it when you sell. Go with the 30 year fixed.

Answer 5

If you go for interest only and reach the balloon payment, you will be hard pressed to sell your condo before the balloon payment hits you. So pressed that you might accept lower offers than you normally would, therefore losing money on the deal.

Also, interest-only is no different from rent - you never end up owning the property, only pay the rent to the bank instead of the landlord.

For a long-term perspective fixed rate mortgage would work better and you'd build some equity, which was the reason of you quitting renting in the first place.

Answer 6

If you live in an area that appreciates 3%+ a year, go with the interest only. Make sure you do not have prepayment penalty.

The amount of principal you pay on a 30 fixed is nominal at best.
You could add $50.00 a month to your interest only payment and still be money ahead, and at the same time reduce your principal at a higher rate than a 30 year fixed.

Answer 7

Honestly, the larger the down payment you can make, and the lower the fixed interest rate you can get, the better.

I would not go with interest only. You are gaining no equity in the home.

If you can't afford a 30 year fixed with a 20% downpayment, you should consider purchasing something less expensive.

Answer 8

check out a few loan calculators