The people at quicken loans explained it to me but I wanted to hear from people that had one. We are not planning on moving as we are both 50 and tired of relocating
Can anyone give me the pros and cons of an interest only home loan? We are staying in this house, FOREVER, Al?
23
Mar
5 Comments
Posted in Uncategorized
Tags: Anyone, Cons, Forever, Give, Home, House, Interest, Loan, Only, Pros, staying, This
ananamas
March 23, 2010 at 10:57 am
It’s real simple:
If you want to *never* pay off your house, and *never* own it outright, then get an interest only loan. Otherwise, get a regular loan.
You say you are 50 now. That means if you got a 15 year regular mortgage, you would own the home outright when you are 65. If you got a 30 year mortgage, you would own the home outright when you are 80.
Do you want to be 85 and still making the same mortgage payment that you’d make now? If not, then *don’t* get an interest only loan because that is exactly what you are signing up for!!
Those are the cons. The pro is that your payment is lower and might allow you to afford a house you couldn’t afford on a regular loan. But really, if you can’t afford the house on a regular loan, might you be better off getting a house that’s a little more within your budget?
I don’t say this to be cruel or callous, but if I were in your situation the only way I’d consider an interest only loan is if I didn’t expect to live long enough to see the loan paid off. Otherwise, you are basically signing yourself up to be in debt forever, and who wants a huge debt hanging over their head when they are retired?
Finally, don’t take the Quicken Loans people’s advice – they just want to sell you the loan that makes them the most money (trust me, personal experience on that count).
Hector L
March 23, 2010 at 11:02 am
Have the people at Quicken loans heard of how we got into the mortgage crisis we’re in now?
Interest rates are dropping and so are home values, nobody knows how low. Start paying your home off right away. You may want to leave something for your kids.
Stay away from interest only and ARM’s. Do a conventional fixed rate loan.
Tim
March 23, 2010 at 11:14 am
The pros are generally lower payments.
The cons are the interest rates are normally set for a certain number of years and then the loan adjusts.
Another con, is the payment never goes towards paying off the balance. You can pay additional amounts to the basic payment towards the balance.
In certain circumstances an interest only loan makes sense. In your case it may not make sense.
We have an interest only loan that has a 10 year term. We got the loan two years ago and plan to sell next year. We had used equity in the house to buy rental property. The interest only payment is affordable if we have no income coming in from the rental, that is why we chose this loan.
The 10 year term gives us a 7 year cushion. For us, it made sense because we do not plan on living there for very long.
Paul in San Diego
March 23, 2010 at 11:36 am
An interest-only loan will cost you less per month. But, as a rule of thumb, you lose about $500 the first year per $100,000 borrowed when you compare how much you save in payments versus how much equity you would have gained with a fully-amortized loan at the same interest rate. And, this goes up incrementally each year. That is, the second year, you may lose $700 (get $700 more equity in the property versus how much you save in monthly payments).
But, you’re also paying more in interest each year, because you’re not eating away at the principal (your annual tax deduction doesn’t decrease each year, like it would with a fully-amortized loan). You also get the use of that extra money, which you can invest in something else (like a 401k). So basically, the point where you break even (the financial gain you get by having an interest-only loan versus the equity you would accrue with a fully-amortized loan) is about 7 to 10 years.
So, if you plan on staying in a home for less than 7 – 10 years, an interest-only loan would be better for you. In fact, most interest-only loans are only for a maximum of 10 years, with either a balloon payment (full payoff) required or it reverts to a 20-year, fully amortized loan (your payments go up to about 1.5 times what they are now). But, if you plan on staying in the home for longer than that, lean toward the fully amortized, fixed rate loan.
Then, there’s your age as a factor. In 5 years, you’re not going to pay much of the loan off, since most of your payments went to interest. So, your tax write-off that does not decrease appreciably each year. Beyond that, though, the tax writeoff is significant. That may make you lean toward an interest-only loan. But, remember that 10-year interest-only period will come to an end. So, at that time, you would either have to refinance (and who knows what interest rates will be), sell, or pay the increased monthly payments. Age is then a factor, because you wouldn’t want the instability of an interest-only mortgage going up significantly per month when you’re about to retire, possibly on a fixed income.
One last thing to consider: If you come into extra money (thousands of dollars) and want to put it down on the principal of your balance, this will lower your payments in an interest-only loan, since your monthly payment is based on the balance times the annual interest rate, divided by 12. If you put money toward the principal with a fully amortized loan, this will allow you to pay the loan off quicker (more money goes to the principal each month). But, it doesn’t reduce your monthly payments.
I went with an interest only loan on all my properties (primary residence and two rental properties). The plan is to hold onto the rental properties until the interest-only component expires, and then sell those properties at a profit (the market should rebound to near 2005 prices in the next 7 to 10 years, and even at today’s prices I still have about $150K in equity between them).
I will then put that profit down on the principal on my primary residence, lowering the amount financed, before the interest-only component expires. Then I’ll either refinance at a prevailing 30-year fixed rate, or pay the 20-year fixed rate at the existing interest rate (about 6.25%) if interest rates are up significantly by then.
Quicken Loans
March 23, 2010 at 12:12 pm
Hey Fred, just wanted to explain a little more for you from our perspective.
First of all, I’m not familiar with your situation. But the thing people usually want most out of their mortgage is a low payment. By showing you an interest-only option, that’s what we’re hoping to help you accomplish. Keep in mind an interest-only loan is what you make of it – if you want to pay more than the interest, feel free to do so. We never have any prepayment penalties. You can pay your home off as quickly as you’d like.
If you’re comfortable with a higher payment and would rather pay your home off quickly, ask about a 15-year mortgage. But having the option to pay only the interest in a month when money is tight is the reason many of our clients prefer interest-only.
In the end, the mortgage choose should accomplish your goals – do you need a payment with some wiggle room or do you want to pay your loan off quick?
Talk with your banker some more and ask about our other options. Rates have dropped significantly in the last day or so.