which is better? fixed rate or interest only paying a little more each month?

Question

Or is the same thing. which one will give me a better rate. I want to buy a house of 345,00 in california sacramento.

Answer 1

I would vote for a 30 year fixed rate interest only. You have the advantage of a 30 year fixed rate and a interest only period for the 1st 10 years you can pay a little extra each month and reduce the term of your loan by 15 years. the trick is this, month 1 I owe $100000.00 my interest only payment is 700 I pay 1000. I have now added 300.00 to the principal right! month 2 I owe 99700.00 My interest only payment is now 680 I pay 1000.00 I now have put 320 towards my principal payment this continues for the 1st 10 years and your rate never changes. This is the best of both world I think

Answer 2

Hi Ruben:

I would prefer the ARM interest only loan for the following reasons:

1. Investment purposes. You plan on renovating a home, thereby increasing its value, without making principal payments.
2. You have a variable income and need to have a minimum payment that may be smaller than a traditional principal and interest payment.
3. The interest rate may be lower than a traditional fixed rate mortgage.
4. You feel that you may be able to make principal payments from time to time.
5. You expect an increase in your salary at some time in the future but would like to purchase a home now.
6. And of course, the tax advantages of owning your own home.
If you pay $12,000/year in rent, the money is gone. If you pay $12,000 in interest payments for your home then that is more than likely a deduction on your income tax. Please talk to your tax advisor to confirm any tax benefits.

The Interest only loan is not the monster it seems. First of all, your interest is fixed for a certain amount of time, even as long as 10 years. Your note will more than likely have certain protections for you as a borrower. The first is a rate cap for each change of interest rate. The second is a lifetime cap. For instance if you start out with a rate of 5% then when your Interest rate changes, if it goes up, it won't be any more than 7% but during the entire life of the loan, your interest rate will never be more than 11%.

Also, if you are concerned about not making principal payments, then simply send extra with your mortgage payment. The good news: YOU decide how much principal sent in. WWW.bankrate.com has excellent, easy to use calculators to help you figure out each scenario. I often use it for amortization schedules. If you have Quicken, they also have those "what if " calculators.

One more thing to consider: How long are you going to be in the loan? There are very few people that stay in their 30 year mortgages. Each time you have a major life change, you'll probably consider tapping into your home's equity. (new additions to the family, college, retirement to name a few) If there is the possibility that you might not need a 30 yr fixed rate mortgage, then why pay for it? At the same time, If you think that you'll be in this loan for 30 years, then a 30 fixed rate interest only might be a good compromise for you. Keep in mind that you'll probably be paying a slightly higher interest rate than a normal fixed rate.

Hope this answers your questions. If not, please call me at 732-991-0536 10am-10pm EDT.

Anne

Answer 3

The question is not valid. You can have a Fixed Rate I/O loan or a Fixed Rate non I/O loan, they are not mutually exclusive...I/O has nothing to do with the rate being fixed or not.

I NEVER suggest getting an I/O loan in an attempt to purchase a home that you could not otherwise afford.

Typically speaking though, the FRM would be cheaper than the FRM I/O in regards to interest rates. If you got a FRM I/O and paid the difference in payments (that of the FRM & FRM I/O) it would turn out to be the same thing, except that you would be paying a higher interest rate.

It also depends on your future plans, do you see yourself staying in this home more than 10 years? Do you see yourself needing to refinance within the next 10 years? Less than 2% of all borrowers actually pay off their first mortgage, the rest refinance or move (or get foreclosed on). If you envision something happening (or possibly happening) in the next ten years, then there may be better programs available to you.

Answer 4

In general, the lower the time of the fixed period, the lower the rate. The longer the fixed period, the higher the rate. I'd be more than happy to explain this to you in more detail as I do mortgage loans. My email is [e-mail] or call me cell 562-201-3338
IZ

Answer 5

Fixed rate is the safe way.
Interest only will certainly provide you the best rate.

Answer 6

fixed rate, payments won't go up when interest rates do.
interest only means you are not paying anything on the money owed--Interest only--, only good if you plan on selling soon, after the property has acquired some equity value.

Answer 7

Fixed rate probably. Id you only pay interest and interest rates go up, you are dead