is a 5yr interest only home loan a bad idea for a 1st time buyer?

Question

I'm in the home market and do not have 20k to place down on a home, nor do I make 150k a year. Would a interest only loan for 5yrs be a bad idea? At that point I could re fi after 5 yrs for a 30 yr fixed, at least I would have some equity

Answer 1

You would only have equity if the housing market went up in your area. I wouldn't do a 5yr interest only loan, try a Fanny-Mae lender. There are products out there. Good luck, the below link is "Mortgage Solutions No/Low Down Payment. For further information about Fannie Mae mortgage products that provide no or low down payment options, choose from the options below."

http://www.fanniemae.com/homebuyers/findamortgage/mortgages/downpaymentnolow.jhtml?p=Find+a+Mortgage&s=Mortgage+Solutions&t=By+Borrower+Need&q=No/Low+Down+Payment

Answer 2

What's the difference in interest rate between a 5 year and a 30 year fixed?

Right now, in most cases, less than .5%.

Couple years ago, a 5 year ARM was about 1.25% less than a comparable 30 year fixed rate. That's when it really made sense to do an ARM, even though at that time, fixed rates were at 40 year lows.

Right now, the rate spread between the two is not worth the risk you are taking by choosing the ARM.

And you can have a 30 year fixed rate loan, with the first 10 years being interest-only, if you need the payment savings in the first couple years.

Rates are still very good right now for fixed rates, so you may as well take a good fixed rate and not have to refinance (and pay a few grand in closing costs again) in a couple years.

Answer 3

Hi,

Ditto to the other answer about 5 years ago!

Contact a loan broker that specializes in FHA mortgages.
You only need 3% down to buy FHA. My son just got 6.65% on a 30 yr. fixed. They are for relatively low income ( low now is so high) and not great credit folks to get them into a home.

Please don't take that interest only loan. The notion that youwill have equity after 5 years is a very, very long shot. First of all by paying int. only there is no equity building up from your monthly payments. Second the likelyhood that values will go up enough to have enough equity to sell and pay all fees is a very long shot.

So be careful and talk this over with your re Agent and ask them if they don't know someone who can help you get FHA financing.

Answer 4

If you currently have a bank account or credit union account, make a visit to a loan officer at one of those offices. They will run your credit and take all financial info from you , then establish if they will loan you money to buy a home. You can also speak to a reputable mortgage company. This is the first step to knowing if you are able to buy at this time. If you are, they will then tell you how much $ they are williing to loan you. They will give you a preapproval letter stating the amount they will loan you. Now you will be able to speak to a real estate agent and look for homes in your price range. When you find a home and want to make an offer, your agent will submit the offer along with a deposit of 3-3.5% (of offer price) and the preapproval letter to the seller or seller's agent.

Answer 5

Yes, bad, bad idea. Our friend got an interest only loan, and then lost his job, so now is out of luck.

Depending on where you live and your credit rating and amount of debt, you might qualify for an 100% financing - 80/20 loan. We didn't have enough for a downpayment on our loan, so we got an 80/20 loan. Basically you have 2 mortgages - one for the first 20% of the mortgage to cover the traditional downpayment and avoid PMI and a second, main, mortgage for the other 80%. This avoids PMI and you get a bit better rate than doing a full 100% financing.

Answer 6

Market conditions today make ARMS and interest only loans a bad idea because when the loan converts to P&I, you will not eb able to afford where you live. Also, with an interest only loan you don't build any equity and if you refi in 5 years, you will be doing a refi for rate & term only....

Best to buy what you can affrod or wait and save .....

Answer 7

It would have been a great idea 3-5 years ago. Now that home prices have been so inflated, it is not a good idea.

I think there will be a secondary correction in the housing market when people with loans such as you describe have to refinance. Many will not be able to afford the home they are living in and will be forced to sell.

I would concentrate on saving as much as I could for a down payment and waiting for the housing prices to fall further.

Answer 8

Don't do it! IO are for investors looking to flip houses, or you plan on selling in a couple of years hoping the value increases. Get a 3 or 5 year arm, this way you'll get a low rate for a few years. Then after building some equity you can either refi if you love the house or sell it. IO is like renting, your getting no return on your investment. Mortgage Consultant.

Answer 9

Ditto ... go FHA! They only require 2.5-3% down. You will have to pay private mortgage insurance (PMI), but the good news is that PMI will also be tax deductible in 2007 ... in addition to your interest on your home. (Just recently informed about the PMI tax info myself!)

Make sure you get a good loan officer that can give you options! Ask your agent who they can refer to you. Also, in some areas there are special programs for first time home buyers that can help pay for closing costs. (Ask your agent and loan officer if there are any in your area!)

Answer 10

you don't build up any equity for an interest only loan!!!!

interest only loan meaning your payment only goes towards the interest of the loan.

that means after 5 years, the total balance that you owe would be bigger than what you originally borrowed. this is a really bad idea!!

stay away from broker / agent that encourage you to get interest only loan. they just want to make you believe that you can afford it while you might not be really ready. they get commission out of your loan.