My brother is thinking about getting an interest only loan and paying interest only and using the rest to invest in a roth ira. Is this a good idea? His payment on his house is $1200 per month and he is hopning to cut it to $600 per month, giving him $600 per month to invest. What are the pros and cons?
2006-11-16 04:42:13 · 5 answers · asked by Kevin 4 in Business & Finance ➔ Investing
problem is interest rates will almost certainly go up while hes paying interest only.when it comes time to refinance that loan he'll face higher interest rates, and if the payment now is difficult, five years from now he'll be forced to sell his home because he won't be able to afford payments. this is what the housing market is facing currently.....millions of homes will soon be on the market because people cant afford the higher rates.
.we got an interest only because we knew we would be moving soon. interest only loans are only good for short term.
2006-11-16 07:07:08 · answer #1 · answered by bush deathgrip 2 · 0⤊ 0⤋
There are great advantages to using an interest only loan to manage the equity in your home. Be aware that you will not be paying down the loan and with certain interest only loans you may even be adding to the principle of the loan if you are paying below market rates. As long as you are living in an area where home prices are rising you should be able to walk away from the home in the future with equity still in the home. If you are planning to pursue this you must have the discipline to put the money saved away in a place that is safe, liquid and that is getting a rate of return at least at the level of your after-tax cost of the money you are borrowing. I would recommend that your brother buy and read the book "Missed Fortune 101" by Douglas R. Andrew as it will explain the logic and the tools needed to make this work.
2006-11-16 05:27:38 · answer #2 · answered by Marc C 1 · 0⤊ 0⤋
Depends on what he is going to put in that IRA. If in a bank or bonds - no. The intrest gained on the investment minus the taxes on it will be less than what is paid out in interest on loan. If not an experienced investor in stocks should not do it. Leverage is a double-edged sword + market quite high now.
2006-11-16 04:49:36 · answer #3 · answered by vegas_iwish 5 · 0⤊ 0⤋
I would say yes, as long as he really knows what he is doing. The next thing to make sure of is if a roth ira is the best option for him.
What % will he expect to make from it? Would a well diversified mutual fund be better for him?
Here's a page for finding a good good mutual fund to invest in:
http://www.best-stock-trading-systems.com/mutual_fund_ratings.html
2006-11-16 18:45:16 · answer #4 · answered by Anonymous · 0⤊ 0⤋
not as wise as in 2001's. Just look at the current trend on short term interest rate trends. It is dangerous.
2006-11-16 21:00:14 · answer #5 · answered by annuwilstech 1 · 0⤊ 0⤋