I have an 80/20 ARM that will adjust in July of 08. I am currently looking at refinancing my loan. I bought my home in a small town that is growing fast and building way bigger homes. I have owned my home for a little over 2 years now. I bought the home brand new for 172,900 and the value has increased to 195,000. I currently owe 168,500 on the mortgage still. I only plan on living in this home for maybe 10 more years before selling. I live paycheck to paycheck and some months can be tight, but I have never made a late payment. Would an interest only loan be ideal for me if I plan on selling within 10 years?
2007-10-22 02:41:00 · 9 answers · asked by Coach S. 2 in Business & Finance ➔ Renting & Real Estate
No, living paycheck to paycheck means you don't have good control over your money so you wouldn't pay any extra on the house just interest so in 10 years you are where you are now with the same mortgage.
Who knows if you will have more money in 10 years but you will have the same debt. Very little goes to principal in a fixed rate loan but at least you make some progress. A interest only is just like renting but all the responsibility of a home.
Interest only is for people who have unfixed income like commission sales or seasonal work so they can pay when they can except interest. You might never pay a principal payment if not scheduled.
2007-10-22 02:44:59 · answer #1 · answered by shipwreck 7 · 0⤊ 0⤋
There are two main problems with interest only loans. You never pay principal and therefore don't build equity from paying down the loan.
If your LTV (loan to value) ratio is high, they are risky because if you had to sell you are much more reliant on the local real estate market having increased or least stayed the same.
That said, you have some equity which is good and would help to protect against a downturn in the real estate market. If you could refi at a lower rate and take out a 15 year loan, you would almost own the house after 10 years instead of owning no more of it than you do today...
Generally people's incomes increase (even if only slowly) and as the years pass your mortgage payment will consume less and less of your paycheck. Get a 30-year or 15-year fixed and pay the darn thing off!!
Good luck!
2007-10-22 09:50:01 · answer #2 · answered by Rush is a band 7 · 0⤊ 0⤋
I disagree with all of these guys and no ofense ta anyone who expressed their opinion and that is what they believe so I do not mean to be disrespectfull in any way. An interest only loan can be done for a period of ten years interest only its called a 30 year loan with 10.20 10 years interest only 20 fully amortized. Also the bigest equity in your house will never come from your payments since the first ten years of a loan are used by the bank to prepay your interest and then it starts increasing your principal payment at a very fast rate. The idea is not to pay the bank more to live in your house while it accumulates value but to pay as little as possible while it accumulates value and you benefit from that much more than you would benefit from the 50 to 100 dollars that go to your principal
IN 10 years yyour house will triple in value and you will have the same loan but the house will be worth three times its original value. Why pay more or sign a contract for higher payments when you live day to day and one late payment can kill your credit. I would and always pay the least possible then sell the home and buy a bigger one with the money I made from the first home ( why a bigger one) because the higher the price of the home the more equity it accumulates a 100,000 dollar home increase 10% and you made 10,000 a one million dollar home where you owe 100,000 THe 900,000 was profit from selling other homes ) will increase at 10% by 100,000 get the idea moving changing and selling is like moving money it should never stay in one place waiting to grow move it expand it and live inb it and poay the least possible while you are doing it
2007-10-22 10:09:11 · answer #3 · answered by Fabio G 3 · 0⤊ 1⤋
That's never an ideal solution. If you can't afford your house, you really should consider selling and finding a place you CAN afford.
If that's not an option, you could also try selling your cars and paying cash for some inexpensive ones. That'll get rid of a monthly car payment. You could also consider dropping your cell plan and high speed internet. Just get the basic cable - bett yet, spend $50 and get some rabbit ears and not have a cable bill. Drop to the cheapest phone plan too. Everyone and their brother has Yahoo these days, and they have a FREE phone service through their messenger. You can leave voicemails for anyone. You should also take a look at your spending habits. I certainly hope you're packing lunches for work & you're not eating out. Start shopping at places like Aldi, you can get some great deals there. You can save several hundred dollars a month just by doing these few things. Sometimes you have to make sacrifices when you get in over your head. The LAST thing you want to do is take out an interest-only loan!
2007-10-22 10:03:31 · answer #4 · answered by Roland'sMommy 6 · 0⤊ 0⤋
In your situation the answer is a qualified yes. Since you only intend to live in the home for ten more years and do not intend to pay it off, it is a good idea. The house will appreciate in value on a average of 4% regardless of you paying on the principle or not. You wouldnt make a significant dent in the principle for 7-8 years. So look for a 10 year interest only 30 year fixed loan. If you decide to stay past ten years the interest will be added to the payment and will amortized over 20 years and not 30 so it will be a significant jump. However if you stick to your plan of living there for only 10 years. An I/O loan would be a reasonable option for you.
2007-10-22 09:51:53 · answer #5 · answered by Bob D 6 · 0⤊ 0⤋
An interest only loan would be a terrible idea in your situation. First off, the interest only feature will probably last for no more than 2 or 3 years in most cases. At that point it will switch to a fully amortized loan over the remaining term. When that happens your payments will increase. The longer the interest only feature lasts, the greater will be the jump in your payments when the full amortization kicks in.
Lets say you could find a loan that would give you 5 years of interest only payments. At 6.5% your payment would be $912.71 for 5 years. At the end of year 5 your loan would effectively convert to a 25 year fully amortized loan. Your payments would jump to $1,137.72
A fully amortized 30 year loan would cost $1,065.03 right now. If $150 a month makes that much difference in your cash flow you should consider getting out now as you have too much house for your income.
2007-10-22 09:56:37 · answer #6 · answered by Bostonian In MO 7 · 2⤊ 0⤋
Interest only loans give you the option to pay just the interest. You can plan to pay principal as well but know that if money is tight one month, you can make less of a payment on your mortgage. If you will be there 10 years, that should be plenty of time for your home to see some appreciation. http://www.fairfax-county-homes.net/
2007-10-22 10:18:31 · answer #7 · answered by Anonymous · 0⤊ 0⤋
An interest only loan is never ideal, because you are never paying on the principal. You will never pay down the mortgage, so it is no better than renting from a financial standpoint. These type of loans often get people in over their head because they are getting in to homes that they really can't afford and then they overextend themselves when the mortgage rates adjust.
2007-10-22 09:52:54 · answer #8 · answered by love 6 · 0⤊ 0⤋
Interest only loans are generally not a good idea. Always bear in mind that your value of $195,000 is no guarantee that you would receive such an amount at sale time. You would be better off using a conventional loan which reduces principal monthly.
2007-10-22 09:48:32 · answer #9 · answered by acermill 7 · 2⤊ 0⤋