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standard loan vs interest only

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standard loan vs interest only

Old 08-31-05, 01:41 PM
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standard loan vs interest only

what do you guys think, I have heard both sides from the mortgage people. One guy told me to take the interest only and then add on the difference of what I would normally pay to pay off the principal quicker.
Old 08-31-05, 02:07 PM
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What would be the point of that? Why not just get a normal loan and pay off both? There's no advantage to you in doing one vs the other. The advantage is all to the bank, who are hoping you'll pay the minimum you can (the interest-only part) and thus increase your chances of defaulting on the loan when the payments go up.

Here's the truth of the matter: An interest only loan is a gamble. You're gambling that you'll either sell the place before the payments increase (and pocket the difference) or that your income will go up enough for you to be able to afford the higher payments after the interest-only period expires.

If you can afford a standard mortgage payment and don't feel like gambling on selling the place or making more money in 5 years, stick to a normal loan.

The question isn't "which loan is better", it's "which loan is better for your particular situation".

Last edited by Otto; 08-31-05 at 02:11 PM.
Old 08-31-05, 02:12 PM
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what he/she said
Old 08-31-05, 02:13 PM
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I don't understand why on earth people would do interest-only loans. I understand that flippers might be attracted to it, but flipping for a profit is hardly a sure thing nowadays.

I heard an amazing stat on CNBC a few days ago. In 2002, 2% of new home loans were interest-only. Now, 60+% of new home loans are interest-only. That is pretty scary - there are going to be a lot of people who get seriously fucked - and have only themselves to blame.
Old 08-31-05, 02:15 PM
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Originally Posted by Static_Rainbow
what he/she said


I'm all man, baby!
Old 08-31-05, 02:17 PM
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Originally Posted by Otto


I'm all man, baby!
sorry, did not mean it like that. friends?
Old 08-31-05, 02:21 PM
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http://www.dvdtalk.com/forum/showthr...light=interest
Old 08-31-05, 02:24 PM
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Someone who is fairly well off has been encouraging me to go the interest-only route, particularily at a young age. The basic premise being that in the first several years of a home loan , anything you pay down in equity (not a whole lot early on) will just be coming back to you any way when you sell. You're better off counting on appreciation and improvements for equity and putting the money you save in a 401K or other higher-yield savings, while taking full advantage of the tax breaks that come along with interest on a home. Is that flawed?
Old 08-31-05, 02:32 PM
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Originally Posted by Thor Simpson
Someone who is fairly well off has been encouraging me to go the interest-only route, particularily at a young age. The basic premise being that in the first several years of a home loan , anything you pay down in equity (not a whole lot early on) will just be coming back to you any way when you sell. You're better off counting on appreciation and improvements for equity and putting the money you save in a 401K or other higher-yield savings, while taking full advantage of the tax breaks that come along with interest on a home. Is that flawed?
Not at all.

What's the use of having "equity" in the house? If you have an alternative that you can put the equity money into it will at least be earning interest. Your home goes up or down in value the same. But if you're not paying any extra into equity you get a higher percentage return on the money you sank into the house. When you sell you'll have the same net amount of money whether or not you paid equity in.

This of course assumes you'll be able to continue making payments when you need to start paying in equity and you don't need the forced savings plan and can use the equity amount for something more productive than buying normal consumer goods.
Old 08-31-05, 02:33 PM
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Originally Posted by Thor Simpson
Someone who is fairly well off has been encouraging me to go the interest-only route, particularily at a young age. The basic premise being that in the first several years of a home loan , anything you pay down in equity (not a whole lot early on) will just be coming back to you any way when you sell. You're better off counting on appreciation and improvements for equity and putting the money you save in a 401K or other higher-yield savings, while taking full advantage of the tax breaks that come along with interest on a home. Is that flawed?
That principal that you're not paying in the first few years of the loan continues to accrue interest in the later years of the loan. So if you're planning on selling the home, it might be worth it, but it's still a gamble that you'll be able to sell the place for a higher price. But if you decide to keep the place, you end up paying more than with a normal loan. Possibly a lot more.
Old 08-31-05, 02:47 PM
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What is the difference in rate for a standard loan as opposed to an interest only loan?
Old 08-31-05, 02:51 PM
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Interest only loans are all over the place, but the interest is lower than a 30 year fixed during the interest only period. You have to be careful as to what you get after the interest only period.
Old 08-31-05, 02:56 PM
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Originally Posted by X
Not at all.

What's the use of having "equity" in the house? If you have an alternative that you can put the equity money into it will at least be earning interest. Your home goes up or down in value the same. But if you're not paying any extra into equity you get a higher percentage return on the money you sank into the house. When you sell you'll have the same net amount of money whether or not you paid equity in.

This of course assumes you'll be able to continue making payments when you need to start paying in equity and you don't need the forced savings plan and can use the equity amount for something more productive than buying normal consumer goods.
It also assumes that you can invest the money you would have used for equity to return a (tax adjusted) rate higher that the (tax adjusted) interest rate of your mortgage. There's no point taking money that could have been in equity and putting it into a savings account at 3% when your mortgage is 6%. In addition, interest only loans are generally at a higher rate than their normal counterparts.
Old 08-31-05, 02:57 PM
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Originally Posted by X
Interest only loans are all over the place, but the interest is lower than a 30 year fixed during the interest only period. You have to be careful as to what you get after the interest only period.
I feel like a broken record player (how long will that idiom continue to exist?) in these threads, but just as the loans are all over the place, there are different i/o products out there.

My interest only loan is nothing like what people tend to refer to. My loan is 30 years, fixed. For the 1st 10 years, it's i/o, and then it becomes, basically, a 20 yr fixed traditional loan. At the same fixed rate.

So, I pay a much lower mortgage for 10 yrs, and there's no uncertainty. I know exactly what my payment will be in 10 yrs, if I don't sell or refinance. Sure, I am still counting on either selling, refinancing, or making more $ by then so I can pay the higher rate, but I feel pretty safe that in 10 yrs time, one of those things will happen.
Old 08-31-05, 03:01 PM
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That doesn't sound too bad.
Old 08-31-05, 03:04 PM
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Originally Posted by Duran
It also assumes that you can invest the money you would have used for equity to return a (tax adjusted) rate higher that the (tax adjusted) interest rate of your mortgage. There's no point taking money that could have been in equity and putting it into a savings account at 3% when your mortgage is 6%. In addition, interest only loans are generally at a higher rate than their normal counterparts.
I don't believe they are during the interest only period. The lender is lending for the short term, not long term for that period.

It does make sense to put the money into tax-free accounts such as IRA invested in the stock market which has a higher average yearly percentage gain than 6% though.

I do think it's wise to plan to move before the interest only period is up. Or you use it to purchase a home when it's the only way you can get it now and your expectations are favorable as to your income rising before the principal payments kick in.
Old 08-31-05, 03:05 PM
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I am probably leaning towards an I/O loan as well. My house has already jumped up $45,000 and likely more before it's done. Seems stupid to pay a bit more a month that's only barely covering principle, when I can pocket that extra money and use it for long term savings potential.
Old 08-31-05, 03:06 PM
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I think a lot of people are going for interest only loans because that is the only way they can afford a house right now, and they are counting on either increased income or being able to sell in the near future. Otherwise, if you can afford the payments on a regular mortgage, I've heard that you should get an interest only just in case you can't make a payment early on. Say you have increased costs like college or something in the first few years. With interest only, you can pay the same amount and pay off some principal, but still have the option of a lower payment without having to go through foreclosure or late payments.
Old 08-31-05, 03:17 PM
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I don't like the indefinite time nature of the IO loan. It seems circumstances all have to work perfectly in your favor for it to be worthwhile. Too risky for my taste.
Old 08-31-05, 03:28 PM
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Originally Posted by X
It does make sense to put the money into tax-free accounts such as IRA invested in the stock market which has a higher average yearly percentage gain than 6% though.
If your house goes down in value and you invested the money you saved in a retirement account you could have problems if you need to sell.
Old 08-31-05, 03:33 PM
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So if people are buying houses and getting interest only loans because that is all they can afford, what are they gonna do when the interest only part is over and the rate goes up?

refinance with another interest only loan?

Sell? But where would they go? A similar house is going to be more now and if they couldn't afford the other house how are they gonna afford more.

It seems to me that if you are using a no interest loan to get a bigger house or just get into a hous period, you are setting yourself up for trouble.
Old 08-31-05, 03:33 PM
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Originally Posted by Duran
If your house goes down in value and you invested the money you saved in a retirement account you could have problems if you need to sell.
There are some real "ifs" there, but that could occur. If you needed the money you would take a tax hit on an early distribution.

I would hope the 10-20% down you (should) put up would take care of the decreased value of the house.
Old 08-31-05, 03:39 PM
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Who the heck pays off a 30 year mortgage these days? I'm 98% sure we won't be here another 30 years, if even 5. It's too small if we start having kids, and while we're happy here, I doubt it's a neighborhood we will stay in forever. Interest-only is sounding better and better to me, as long as we can be disciplined with what we do with the "savings." If we build our next house it may be somethign we stay in 30 years, but we probably won't get a "lifetime" home until further down the road.

Another question I have about this is refinancing. We have a 5 year ARM right now, 1 year into it. I am considering refinaincing with interest only at some point in the next few years. We have 2 loans, 80/20. The 20 is not fixed, so I want to kill it ASAP.

Original loan was $270K. Judging only by similar sales in the neighborhood, I would bet we could get 50-60K more today, but given the bubble, i'm not counting on that equity at this point and we are most certainly not selling in this mess. Figure, very safely, on a 300K sale price in 3-4 years. Is an interest-only loan in my favor? When you refinance, you are only refinancing your existing loan... so I assume equity doesn't do anything towards killing off our 20% high interest loan when we refinance?
Old 08-31-05, 03:42 PM
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That's my other reason towards leaning I/O right now. Well, 2 reasons. I forsee a career change for me that will provide more income, so if/when that happens I'll be able afford higher payments w/o issue. But, I don't plan on being in that house for more than 2-3 years, so I don't see why dumping a bunch of money into it now is going to make any sense, when I'll be getting even money return on it when I sell.
Old 08-31-05, 03:50 PM
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Originally Posted by Thor Simpson
Who the heck pays off a 30 year mortgage these days? I'm 98% sure we won't be here another 30 years, if even 5.
You may not pay off THAT 30 year mortgage, but I sure hope you pay off some 30 year mortgage in 30 years.

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