Buying 1st home, 30 yr. fixed,10 yr interest only loan? ADVICE?

Question

I have applied for a loan of 160,000.00. Approved for 30 year fixed @ 6.75%, 10 yr interest only + (including taxes, insurance, haz-insurance). I am pleased about the payment. What do you think about this? This is a new build. Equity will be on the rise in 2008-2009.
Only serious advice, please. No offense to others. Thanks

This is in Maricopa, Az. In the past, all of these underdeveloped areas have sky-rocketed in price do to the congestion in PHX. And yes, my 20yrs. will stay at 6.75%, fixed. No, I can't predict the future, but the way I've seen it happen, people have regretted not buying in these locations thinking that they would'nt appreciate. I'm still looking into it, looking for those "Hidden" fees. It's not really for investment, I just want a fair deal for me and my children/grand children. The communities are gorgeous and very well rounded. Thank you for all your input. I will get back to you when I get an actual "good faith estimate" in my hands!!!

Answer 1

This sounds like a safe plan for the 1st 10 years. However, keep in mind that your payment will jump way up starting on the 11th year. You will have only a 20 year term to pay a loan originally amortized over 30 years.

Another option would be refinancing in 10 years, but interest rates could be significantly higher (remember 10 years ago). If you plan on being in the home longer than 10 years, do your best to pay a bit extra and go for the 30 year or 40 year fixed rate. If you know you will have moved on within 10 years, go ahead and run with it!

.....As far has equity/appreciation rising in 2008-2009, I can't really argue that......But at the same time I would not count on it. The market has surprised many "experts" up to this point.

Answer 2

OK, if you could pay $1071 per month then it is OK. If you paid $1071 per month then you'd be paying the amount if it were a 30 yr fixed. That way you'd end up with equity after then 10 years and maybe going with the IO loan you're getting a lower rate for that 10 years. (Check first to make sure that there are no pre-pay penalties for making the larger payments.) BTW, does that loan change to adjustable after the 10 years?

Taking an IO loan and still paying the full amount as if it were a 30 year fixed would let you pay a smaller payment in the event of family financial problems.

Answer 3

Who told you that "equity would be on the rise in 2008-2009"?I know of NO ONE who is able to accurately make such a prediction. If you are approved for thirty years, the first ten interest only, do you have to pay the principal and interest in the remaining twenty years ?

Doesn't sound like a smart move to me, even though it certainly will make your payment affordable. Watch out, however, for that interest free bus to turn around and run you over at the start of year eleven.

Answer 4

I'm currently looking for my 1st home and have been asking about the IO loans to. Think about this every time you make a payment your lowering your amount you owe on the house. Also you can make the IO pmts but put extra each month towards your Principal that way you at lease build some equity in your home. Plus you can refi in the 11th yr, Interest only loan are good but only for people that are smart with there spending habits. Plus maybe you could invest some of the extra $$ in a fund ?

Answer 5

The only thing that I see as not a good or wise idea is the interest only part of the loan. After 10 years you will still owe what you originally took out, the only equity you will have is if your house appreciates. FOr the most part homes do rise in appreciated value, but you will never see the double digit increases of the past 15 years, in fact some depending on locality are depreciating, as the market is becoming flooded.

Answer 6

It sounds great, but wait! At the end of 10 years, you will have ZERO equity! Think about that! And just think you are wrong and house prices fall, then you will still owe the bank $160,000 after 10 years even though your house may not be worth it that much! I too do not think this will happen - that is house prices may fall a bit initially but then rise again! So 10 years maybe a long enough time for real estate prices to recover if ever they crash momentarily!

Answer 7

The interest you pay will is calculated on the remaining balance. This confuses a lot of people because they assume their monthly payment will go down as the remaining balance goes down. The monthly payment is the same amount but a higher percentage of that payment is applied to the prinicple . A great way to pay off a mortgage sooner than 30 years and save money in the amount of interest you pay is to make additional payments specified to be applied to the principle balance only. Most lenders allow that.

Answer 8

Your assumption "Equity will be on the rise in 2008-2009. " is incorrect. I wish it were true, but don't count on it. The market has recently turned down, and historically the market stays down for a few years, just as it stayed up for a few years.

You should at least break even in 10 years, but if you counting on a quick profit in a couple of years you are likely to be very disappointed.

Answer 9

It is possible that in just a few short years, you could be upside down in your mortgage. Meaning you would owe more than the house is worth. Hence the boat load of foreclosure now on the market... You might want to rethink that one. Seriously.

Answer 10

You CAN'T count on capital appreciation as a reason to take an interest only loan. Do you like to gamble?