Better deal for a mortgage?

Question

Both loans are for 125,000
30 year fixed interest only 6.125%
30 year fixed 6%

Which is better? Pro's and con's would be helpful.

Expert opinions please.

Save your time and mine with responses like"my ex brother-in-laws neighbor got a deal like this......"
Thanks

Answer 1

Why do an interest only at a 1/8th higher rate the difference in rate is virtually the same as the principal portion in the fixed. Go fixed and get some equity buydown. You will as time goes on be buying down the principal and not playing into the banks hands. For a lower yet payment some lenders for no extra rate hit can go 40 year on the amortization. Heres the numbers
30 Fixed @ 6% $749.40
40 Fixed due in 30 @ 6% $ 687.80

30 Fixed @ 6.125% $759.50 Interest only $ 638.02

Lets say you make payments for 5 years and then sell, with an interest only loan you will still owe $125,000 and will have made $38,281.20 in payments that had no buydown performance. Essentially you are paying $7,656 and some change per year for the priveledge of both a higher interest rate and a fatter banker.
If your market appreciates at say 7% per year your house will be worth about $175,319 in 60 months. Less typical resale costs of usually 9% ( title, escrow, and real estate brokerage @6% ) =$159,540 Less mortgage payoff = 34,540 As you can see there is a reason why interest only loans are being pushed by banks. True they can lower the payment a slight but they are a total windfall for the lender.

Answer 2

Unless you are planning to move before the interest only period ends, the second deal is best.

Even if you plan on moving, your house might not be worth more than your mortgage balance - we are in a downward price spiral in housing right now. You might have to raise money to sell your house.

On the second deal. the interest rate is lower for the life of the mortgage.

With the interest only loan, you do not pay down the principal during the interest only period - usually ten years. Your payments are lower during this time, the only plus.

At that point your loan is recalulated with a 20 year amotization schedule which would cause your payments to jump.

This only makes sense if you can invest the difference in payments during the interest only period and receive an after tax return in excess of 6.125%.

Answer 3

what are your long term plans? Are you planing on moving in the next 10 years take the I/O
If you are planing to stay
Take the one for 30 year fixed at 6% not the I/O. all I/O become a P&I after 2 ,5 or 10 year with a 28 ,25 or 20 term (meaning higher payments)
By the way if your credit score is above 700 your rate today is 5.75 on a 30 year fixed
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