I know people who took out interest only loans a few years ago are now feeling the hurt, but what about people who take out interest only loans now? Here's one that's been proposed to me for a 1080 sq. foot townhome in southern california: 1st @ 6.125%, 5 year fixed adjustable after 5 years. 2nd @ 8.875% due in 15 years (balloon payment) 5 year prepayment penalty of the equivalent of 6 months interest. What do you think?
2007-03-19 16:23:57 · 6 answers · asked by sheila c 3 in Business & Finance ➔ Renting & Real Estate
Depending on credit scores. If they offered this ,you must be 720 or higher. this is a little high for a 5 year arm you should be near the 5.875% area. Second mortgages are all interest only products either a heloc or fixed. the rate is based off CLTV and dollar amount. Most seconds are a ten year maturity based on a 30 year am table. So I would question this 15 year balloon, not a normal product. Last the prepay normal prepays are 1-3 years & soft or hard. Yes Calif is 6 months interest penalty.
2007-03-19 19:01:12 · answer #1 · answered by amstarlender 2 · 0⤊ 0⤋
This is all based on what you can afford. This loan could be changed around for a "best case scenario which would include
1. no adjustments and,
2. no prepayment penalty and,
3. low monthly payment
That is the triangle of death when it comes to mortgaging a home that you cannot put a substantial down payment on.
If it helps at all, southern californian tend to move about every 5 to 7 years so chances are you will sell right about that time or rent it out. Who knows, the rents may have caught up to the cost of owning by then and you might have a nice rental you can hold onto.
I would see what the cost on reducing that prepay to 2 or 3 years before signing.
The 15 year balloon payment is normal. It may be amortized (spread out) over 30 years or less. Your payments are calculated as if it is a 30 year note to lower your payments. What is not paid at the end of the term is due after 15 years.
Again, chances are you will sell the house or refinance @ 5 years anyway so you probably won't ever feel the balloon.
2007-03-20 00:59:12 · answer #2 · answered by Tadow 4 · 0⤊ 0⤋
Looks like you have good credit from the scores that you are mentioning but I would not take the deal. I believe you can get better because a 5 year Prepayment penalty is for people with bad credit or looking for HARD MONEY both you dont have.
The least you would get if you had to would be a two year prepayment penalty. If you do get a prepayment penalty make sure its soft and not hard.
Soft Prepayment- You can sell your home without taking a penalty from the Lender but YOU CANNOT refinance without excepting a penalty from the current Lender
Hard Prepayment- You CANNOT refinance or sell your home without excepting a penalty from the current Lender.
Interest only loans are not that bad in fact for the first two years of the loan you are paying nothing but interest toward the home. In year 2.5-3 that is when you start chipping away at the principal. So interest only loans are good in a 100% financing situation when you are either starting out in a new career and you expect salary advanced in the future or you believe the property will make enough equity to take out the second in two years. Than you can consolidate rate/term into one payment.
Advice:
5/1 arm not 5/6 arm. Interest Only ok.
Better 30 Year Fix Interest Only.
30/30 fixed 2nd.
Both no prepayment penaltys unless your financial situation requires one.
Also to note you may take an extra hit to your rate because of the townhome. If that is the case than talk to your lender what is PAR rate and what you are getting doc'd for. He/She should explain this to you and if they cannot than find another LO. Remember that you are not buying a toaster but taking a loan on a big piece of liability. So be cautious because you can.
If you want me to review your Good Faith Estimate please fax to me and I will send it back.
Good Luck and HAPPY LIVING!!
2007-03-20 19:18:17 · answer #3 · answered by Openthathouse.com 4 · 0⤊ 0⤋
Because the cost of California Real Estate is so sky high, creative mortgage options are available that sound crazy to the rest of us not living in CA. Some mortgage terms are created based on the historic high rate of appreciation and the certainty of a sucessful refinance within 5 years. Interest-only loans have always been a good deal in SoCal because of the high rate of appreciation. But watch out for that bubble! Any loan in SoCal is a risk nowadays. All things equal, this is not the best deal out there. Depending on your credit, this may be the best deal you can get. In this deal, the lender is expecting you to refinance in exactly 5 years. Check for a prepayment penalty on the first mortgage. Your risk is to determine the rate of appreciation and interest rates in 5 years. Historically, you would be able to refinance out of this deal into a better one.
2007-03-20 00:09:41 · answer #4 · answered by Appraiser Guy 2 · 0⤊ 0⤋
Option 2 is a trainwreck. Stay away from Balloon mortages. But Option 1 isn't so hot either, ARM after 5 years means a possible spike in your rate of unknown proportions. But I would take it for now and keep refinincing options on the table within the next two years.
2007-03-19 23:31:03 · answer #5 · answered by douglas l 5 · 0⤊ 0⤋
What really matters is what will you be doing in 5 years. Beyond that, ask them to give you the payments upon the first adjustment. IF you can do that, then maybe, but...dont do 100% financing. IF you have no money, walmart wont give you a bag of candy, dont ask for a house.
have some common sense, the lenders will put you in what they can earn off. YOU know if you can make those payments and put money in the bank....if you cantt...think twice
2007-03-19 23:28:42 · answer #6 · answered by batwanda 4 · 0⤊ 0⤋