I have a interest only mortgage, should i continue?

Question

My loan amount was $670k and at 5.5% fixed for ten years. I start this interest only mortgage last september (2005). I always pay more than the bank asked for, eg IO payment $3070.00, then I will pay about $3600.00 per month. Am I doing it right? Should I refinance to a fixed rate? or just keep paying extra every month to take advantage of the low interest rate?
Thx for your help!

Answer 1

First off that’s a great rate. Second, interest only is a great loan contrary to what many say, it depends on your situation. It appears to me that you can pay principal and should have taken a P & I loan but since you took interest only, you are still fine. You can pay as little or as much as you want towards principal each month and you can continue to do so. It defeats the point of getting an interest only loan but everyone is different. Some smooth mortgage broker probably sold you on the interest only and here you are. Do not worry, your RATE is fixed for 10 years, right? I just want you to clarify something for me. Most interest only periods are 10 years but the RATE may adjust depending on the loan type. Interest only is a form of payment but what about your rate, is it fixed or adjustable? I presume it is not a 10 year interest only ARM (they exist, doing one right now) so let me know when your rate will adjust, if it will, and I can give you some better advice. For now, I would say don’t bother paying any more principal off and decide what you are doing with this home and mortgage. How long you plan on staying in the home, do you escrow monthly for taxes and insurance, and cant you put that extra money somewhere else each month where there is a much higher interest rate. Also, your home mortgage is usually tax deductible but I bet those other credit card balances that you might have are NOT deductible. Stop paying principal if you want but first figure out when your loan will adjust, if it will. You should be less concerned with principal and interest and more concerned that your rate may jump 3% in a year.



Scott

Answer 2

I would absolutely continue what you're doing. In a typical 30 year amortization schedule, your first few years' payments are mostly interest with very little principal being paid. Since you're paying an extra $600 a month, you're paying the principal down much faster than if you had a 30 year fixed loan. We have the same type mortgage, and have paid it down much faster this way. The only caveat is that after a set amount of time (5 years for us, sounds like 10 years for you), the interest rate varies and your payment could go up significantly. We only plan to stay for 5 years, so it works for us. You'll probably want to refinance or sell just before your rate increases. Hope this helps!

Answer 3

You've got a great rate for another 9 years, considering you'd likely get at least 6.0% on a new 30 year fixed loan today.

It's very rare that anyone keeps the same loan longer than 10 years, so there's little point in refinancing to a higher fixed rate. You don't know if you'll be in that home or that loan in 9 years anyway, so no point in paying an extra $3000+ per year in interest plus the closing costs you paid to refinance.

Keep paying extra towards principal. If this were a 30 year loan, you'd really need to be paying $3800-3850 to have that loan paid off in the remaining 29 years, so if you are able to, ramp it up.

This is assuming you aren't carrying any other higher-rate revolving debt, which should be paid off completely before you bother applying extra principal to your lowest rate, tax-deductible loan.

Do not refinance.

Answer 4

I would take advantage and pay the extra money. You are in a good position if you plan on staying for up to 10 yrs. I would imagine after the ten years in 2015 your rate will be variable or will ammortize in 20 yrs. If you plan on staying there forever I would look into fixing it when the interest rates are go down before the 10 yrs so you won't be stuck in a variable after 10 yrs. If less than 10 yrs I would not worry and pay towards the principal every month.

Answer 5

I would refinance to a standard 30 or 15 year mortgage with a fixed rate at my earliest opportunity. It's OK to pay extra now as long as the extra amount is applied to the principle. You should be making two separate payments, one for the monthly bill and a second payment which is for the principle. Otherwise the mortgage company puts your overpayment amount in escrow and it does not lower your principle.

Answer 6

It sounds like your rate is fixed for 10 yrs at 5.5% , which is better than you can get anywhere else now.
Keep that loan & keep on making extra (principal) payments or else you will never own the property . . . although on on very large loan like $670K, you should be trying to pay about $2K extra every month . That will get your principal down to about $400K by the time your 10 yr 5.5% rate is up.
Good luck

Answer 7

At this point you're accumulating $500-$600 worth of equity/mo. That's a good plan. You should make sure your overages are coming off your principle. We won't see a massive fluxuation in interest rates anytime soon. I'd say you're fine. BUT, keep paying that extra money every month you can afford to.

Slainte,


-D

Answer 8

Opinion: stay the same. not confident how they could probably bypass any decrease. In about 2 years, they'd initiate shifting up gradually. under no circumstances believe Yahoo solutions for questions like this.

Answer 9

How important is cash flow to you? if it is, then take advantage of your low rate and payment.