[admin]

A friend just agreed to buy a new home. Many people have recommended that she go with an interest-only loan. She makes enough money that she could easily do a 15-year loan. I can think of situations where an interest-only loan might apply, such as a family with a lot of children that need a larger home but can't quite afford it otherwise. However, I don't think she qualifies for any scenario that I can think of. Interest-only loans make me a little nervious because you really aren't getting ahead, except for appreciation. In what situations would you recommend an interest-only loan?

[babydawn]

Never, I would never recommend an interest only loan. I live in a community that is growing very rapidly. A lot of people are going with the interest only loans because they can get a bigger house for half the cost....initally. People need to understand that at some point in time, you do have to pay on the principle unless you plan to pay the interest only until you die, and then you leave the burden on family. Then people get stuck with a house payment that they had hoped to be able to afford and are now finding they can't because the payment is so large. Why put yourself in a situation where you will be indebted to someone for the rest of your life? My goal is to pay off my home as quickly as possible; not try to look like I have more money than I do. If you want to watch out for your finiancial future, and if you ever want to get ahead, you wouldn't even consider an interest only loan.

[Becky]

You're correct that most people choose interest-only loans because they're trying to get more house for less money and (in my opinion) probably ought to just find a smaller house or find other ways to cut costs.

However, interest-only loans can be great for a savvy borrower. Keep in mind that an interest-only loan does not prohibit you from paying principal--it just doesn't require it.

One big advantage is that they usually reamortize monthly. Meaning, if you are planning on paying down your mortgage beyond what is required, and would like to have your monthly payment requirement go down as a result of that, it can be accomplished with an interest-only loan.

This is great for borrowers who make seasonal income (or a bonus/commission that varies greatly) and would like to have a lighter burden when their cashflow is lower, but would like to send in large sums of money when times are good.

It's also great for people who are middle-aged and planning for retirement. Their income is usually the highest it's ever been during their career but is about to drop drastically when they retire. They can pay down their loan aggressively while working (maybe add in the lump sum they receive for retirement), then be left with a small payment during their retirement years.

But you're right--in my experience the majority of people who are asking for an interest-only loan just have cashflow or spending issues.

[pkeeler]

I would reccomend against the 15 year loan because as one of my friends says "you can always pay more, but they will never let you pay less" For the purpose you are talking about I would suggest the 30 year fixed. And then to pay an extra 100 or 200 dollars a month, or whatever you can afford. You don't know how much that will affect you down the road. It helps a LOT!

As far as interest only loans go. Yes, there are a lot of people that get them for the wrong reasons. However, I am a real estate investor, and I think there is definately a time and place for interest only loans. It depends on what your goal is. My goal is not to pay off the property. so interest only works for me. I make my money on appreciation and cashflow. If you're goal is to pay off the property. (Which is what most people go for) Interest only is not for you.

I hope that helps.

Pkeeler

[mcmama]

Interest only is a great option for investors and for those who will live in the house only a short time. In a rising market, such as the one I live in, with low interest rates still available this is really a win win for those folks.
It is NOT a good idea to go interest only if you are doing it to buy the house of your dreams which you want forever and forever. If you cannot afford to buy that house any other way, you really cannot afford the upkeep and taxes on that house. And you certainly cannot afford to have to sell it for an unforeseen reason in a declining market.

[pkeeler]

Wise words

[markbarnes19]

The best kind of interest-only loans are equity lines of credit. Depending on the scenario, many lenders offer equity lines with no interest. I would not, however, recommend an interest-only mortgage. If the goal is to save money on the monthly home loan, it is much better to take an adustable rate mortgage. The rates are extremely low, and the payment will, in most cases, actually be less than an interest-only payment. Plus, with the ARM, the mortgage is actually amortized, or reduced.

[pkeeler]

In many cases this can be true, but in many other cases, you can get stuffed on an ARM (adjustable rate mortgage). Interest only loans can be fixed rate, so when rates go up 3%, 4%, 5% or more. Then you are stuck with a payment that could be hundreds more than your budget will allow. Then you're stuck in a foreclosure situation. That's something to avoid at all costs. Given that rates are subject to change at any time, based on the economy. I don't know of a situation that I would feel comfortable getting an ARM for myself. Even as an investor.

Pkeeler

[markbarnes19]

Actually, ARMs do not "go up" anytime. First of all, they adjust, which means they could go up or down, based on a particular index. Also, all ARMs are fixed for a particular period. A 5/1 ARM, for example, is fixed for five years, so your rate can't change during the first five years of the loan. Other ARMs are fixed for various periods. Believing an ARM changes all the time is the great myth that discourages most people from getting one.

[markbarnes19]

Sorry to disagree again, but I think this is another bad idea. First of all, most people today never live in a home for fifteen years. Second, if you are interested in building equity, why not take the 30-year mortgage (fixed or adjustable), so you don't have to worry about coming up short on a tight-budget month. Then, whenever you have extra money, just add it to the principal mortgage. If you want a 15-year mortgage, just calculate what you have to pay to pay off your mortgage in that time, and add the money each month, when you can.