Does only making interest payments on a mortgage make sense?

Question

I'm doing zero-down because a) I have to furnish the house and b) putting 15-20% down on the house doesn't significantly lower the interest rate and I'd rather have my extra cash sitting in a 5% savings account. Also, I plan on staying in the house for less than 10 years.

Answer 1

Solely from the information you provided, NO, it does not make sense to take on an interest only type of loan.

I think you have either been mis-led or are somewhat under educated on mortgages (please don't take offense) from your statement that 15-20% down would not significantly reduce your interest rates...not only would it reduce your over all interest rates but it would lower your monthly payments as well...

Your statement that you'd be better off with that money in a 5% savings account would also be incorrect. You'd be losing more money in interest and payments on your mortgage than you would be making on your savings...if you had said a 10%+ mutual fund or something then I might feel differently.

Basically speaking, if you go zero-down on a home, you are going to have to do one of two things. Either get a single loan for 100% financing and pay PMI (private mortgage insurance, required by most lenders for loans over 80% of LTV) or take on a 80/20 loan. With a 100% financing on a single loan the PMI will be an additional cost that would negate any money you thought you were saving, or 'making back' through the interest you'll be gettings on your savings account. If you go with an 80/20 type of loan, you will avoid paying PMI, but the second mortgage loan of 20% will have a higher interest rate also negating your savings interest gains. In your situation, I MIGHT make the suggestion of going with a 80/20 loan structured so that your 80% loan is an Interest Only 10/1 ARM, and the 20% loan is a 30yr FRM. The 20% loan will ALWAYS be a higher interest rate, so having an IO option on the 80% will afford you low payments, and the ability to pay the 2d loan down faster, thus minimizing the total interest paid on it.

If you'd like to review your situation in depth and in detail, then I would be more than happy to answer your questions fully, and develop a plan best suited to meet your needs and situation.

Answer 2

No, the interest only loans do not make any sense to me. I think you are stacking the deck against yourself.

When you purchase property, there are two factors that contribute to your building equity in the property from the time you purchase it, to the time you sell it.

One is appreciation. Assuming you bought it at the right price, among other factors, you have a reasonable chance of seeing some appreciation in value come your way every year you own it.

The second factor is chipping away at paying down the principal of the mortgage balance. Even if it is only a negligible amount each month, it's like money in the bank for you.

The equity balance at the time of sale will be determined by what you realize (sell it for) less what you owe on the mortgage loan. If you have been paying interest only, you have not realized any 'buy down' accrual opportunities.

This leaves you with only one possible way of increasing your equity between purchase and sale times; and that is appreciation. And real estate is not always appreciating. Some times, like now, they are either neutral or depreciating .

As in investment strategy, I would never go into an interest only loan for the reasons stated above.

I hope I did a good job of explaining this. It is simply my personal opinion of course. That's all I have.

Good luck to you.

Answer 3

You don't get rich by paying down your mortgage, but you should look at all your options when it comes to financing (different companies & diff. programs). interest only options don't necessarily save you money but the monthy payments are lower, lenders tend to charge more for IO loans. If your getting 2 loans a 1st & 2nd, look at the 2nd closely the 2nds tend be HELOCs which will change according to the Prime Rate. If you feel the Fed will lower rates in the coming future u may like it, if u think rates will go up u may want to opt for a fixed rate 2nd.
IO loans vary from monthly, adjustables to fixed for 30 years.

Also, shop around usually a 5 % - 10 % down payment can make a .5% in interest rate, and dont opt to paying points.

Answer 4

No no no Intrest only loans are BAD....
You may as well rent.... although you can approve for me, you neer get ahead... There are loans out there with little or no downpayment, on a coventional paypay schedual.
Pay back for points on a mortgage is 7 years.
If you have a 10 yeal plan, id consider paying a point, and get a FIXED rate mortgage- The rates are volitile now, and will go up!

Answer 5

Well, you're not building any immediate equity in the house, but you are getting the tax benefits from the interest. And if the property assessments go up in advance of your loan value over the next 10 years then you will have made equity and I'd say you made the right move.

Answer 6

Sounds like a good plan. The only problem comes up if you decide to live there longer, and then get hit with the higher mortgage payments down the line. If you had to stay, you could always refinance at that point.

Answer 7

With zero down and making interest payments only, realize you will have negative equity if house prices fall. That means you will have to pay the mortgager more than your sale price if you decide to sell and cannot get the price you paid.

Answer 8

Interest only loans work for you only when the property will appreciate. The market is starting to go down now, so the house will be appraised at less than what you bought it for if you sell in less than 10 years..

Answer 9

It may indeed make sense depending upon your financial situation at the time. Perhaps after a period of time, say three to five years, you will be able to make principal payments... that should be your long-term goal. What will most likely work in your favor is that the home will increase in equity... and when you sell you'll have a tidy profit.

Answer 10

It would not be in your best interest only to pay interest, unless you had no alternative. The risk is that when it came time to sell the house it would not appreciate in value enough to cover the cost of the sale--real estate agent commission, closing costs, etc. If you pay down the principle then you get that back when you sell it.