Should I consider and interest only loan?

Question

I am first time home buyer.
I am interested in the interest only loan.
After the three years I can handle the increased payment.
Money is tight right now, though.
In the future my salary will rise, as I am at the bottom of the spectrum now. pay range is 60k to 110k.
Also because of my income I am looking to reduce my tax liability.

What are some of the benefits and disadvantages to it.
I know that you gain no equity during the first few years

Answer 1

Absolutely not! The last time Interest only loans were so widely available was just before the great depression.

This worked fine so long as the houses didn't lose value. However, the drop in real-estate values during the Depression pushed a large proportion of interest-only loans into foreclosure. Lenders switched entirely to fully amortizing loans, and that has been the standard mortgage loan since.

The new breed of IOs differs from those of the '20s in two ways. First, they are not interest-only for their entire life, only for the first five or (more often) 10 years. At the end of that period, the payment is raised to the fully amortizing level. This appears to make them less risky than the IOs of the '20s, but not so. They are more risky.

Limiting the interest-only period to 10 years means little because few borrowers these days hold their mortgages for 10 years. Most will refinance or sell their homes while they are still in the interest-only period.

(Selling quickly for capital gain, and refinancing to "put equity to work," reflects a new mantra: You grow equity through property appreciation, not by paying down your loan balance. The mantra ignores the fact that while mortgage amortization is in the homeowner's control, appreciation is not.)

A risky change: Now they're adjustable, too
But the big change in the risk of IOs, relative to the '20s version, is their attachment to adjustable-rate mortgages, or ARMs. ARMs are risky in themselves because borrowers are exposed to rising mortgage rates when market rates increase. Adding an interest-only feature heightens the risk. When the ARM rate is adjusted sometime in the future, the new payment is calculated using the original loan amount, as opposed to the smaller balance on a fully amortizing ARM.

Consider, for example, an ARM with an interest-only payment option for 10 years and an initial rate of 4%, which resets every six months. In a worst-case scenario, the rate would ratchet up by 2% every six months and reach a maximum of 10% in month 19. The interest-only payment in that month would be 150% higher than the initial payment. The fully amortizing payment, in contrast, would be only 82% higher.

Gimmickry, misdirection, misperception
The attachment of the interest-only option to adjustable-rate mortgages also explains the rapid growth in the popularity of interest-only loans. Adding an interest-only period to ARMs opened the door to a variety of merchandising gimmicks based on an ingenious piece of misdirection: IOs are presented as a new type of mortgage, with lower rates than standard fixed-rate mortgages.

Answer 2

As long as you know what the payments *could* rise to over the next few years, I don't see any reason why you should not. Is there is a reason that you do not want to go with a conventional or even an arm so that you can at least build some equity?
A friend of mine moved up 4 times in the recent good market years on interest only loans and she just re-fied in the house she plans to stay in for a 30 year fixed. So they can work if you are lucky and careful. Keep an eye on what is going on with the economy and rates
As long as your eyes are open going in, go for it and congratulations!

Answer 3

The interest only loan is only advisable if you plan on selling in a year or two. By the time 3 years goes by, the variable rate on your loan will have increased your payments by a thousand dollars. Go for a fixed rate, 30 year loan. You're going to be paying almost all interest the first few years so the tax benefits are still there and by then your anticipated income will make your payments easier!

Answer 4

No no no no no. Generally speaking if you can't afford a house with a traditional mortgage, then really can't afford a house. You never know what will happen in the future. What happens if you don't get a raise? So when you go to sell in the future, what if have no equity in the house? Then basically you have nothing to show for "buying" a house. What if your house loses value and you are upside down on the house? I know these are all big what-ifs, but you have to consider these when purchasing a house. There is huge rise and foreclosures in the county, and the reason is because of the interest only loans. Please read the article below

Answer 5

I/O loans are only something you want to do for a SHORT period of time, if at all!! And you need to look at how property values are increasing in your area before you commit to this type of loan as you may not acquire any equity in the property. Depending on the loan amount, you may only be saving $100 a month cash in your pocket by doing an interest only as opposed to that money paying down your principal. Additionally there is a hit to the interest rate, often times, just to do an interest only loan.

Answer 6

Interest only is a bad idea, however, there are other options. One would be to do what is called a temporary buydown.
Similar to the idea of paying points to buy down the interest rate, a temporary buy down is cheaper because you buy down the interest rate for only a few years, (usually two or three).
You can also to a 3/2/1 buydown, which would buy down the interest rate 3 points for the first year, two for the second and 1 for the third.
That would allow you to afford the payments the first few years, and handle the known and preset increases as your earning increase...

Answer 7

stay away from the interest only
if there are layoffs or other unexpected problems over the next few years and housing values fall like they are doing in many places now you may be stuck unable to afford the full payment when that kicks in and the house will not be worth enough to cover your loan if you need to sell it.

Answer 8

Only if you really, really are desperate for the extra cash flow. Might be better to get an additional job or business income and not go with the interest only.

Answer 9

No, bad idea. You aren't building any equity at all. It allows you to buy more house, but since it isn't yours to begin with it is better to live below your current means and get a house and mortgage you can afford.

Answer 10

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