Never buy a house on an interest only loan. after we all wake up from this fairy tale...

[movie zombie]

tanuki, you gave a really good example of what is happening with IO loans. some like mara are not in that camp and it makes sense. but for others the risk exposure is very very very great but the lure of owning a home is so great that they take the chance not really understanding the risk. and therein lies the problem: how many people actually read every word of their loan papers? we do and did and it was noted by the mortgage broker that we were ''unusual''.

also, tanuki, i want to thank you for not taking offense at anything i wrote given that your husband is a mortgage broker. most people don''t understand that the mortgage broker is selliing a product...they expect that person to be more of a loan counselor, which is not the job of the mortgage broker. the mortgage broker is not a financial consultant, IRS expert, loan counselor or any of the things we may want them to be. and each mortgage broker has different ''product''.

i think another problem in the real estate business has been in the loan underwriting side. the loan underwriter is the person who takes all your financial data and crunches the numbers to see if you satisfy requirements to get the loan. at one time only 1/3 of your monthly income was allocated for housing expenses in the ratio used. now it is 1/2........... this has, of course, allowed people to qualify for a loan that would not have qualified in the past.

there is, however, a new breed of home buyer [lots has been written about them in the last months]: the home buyer who expects to trade up every 2-3 years and make money due to the ''equity'' they get because their current home has gone up in value during those 2-3 years. they are attempting to play the housing market like the stock market. its serial home ownership using serial IO loans. these people do not have the salaries to be able to afford the home they''re in but they''ve been smart enough to make the system work. and its worked for quite some time. however, these people are at extreme risk when the bust happens.

i believe it is for these reasons that most people who are ''old fashioned'' do not see the value in an IO loan.

for people like mara who have their financial ducks in order and plan to move on in 5 or less years, there is still risk but it is an EDUCATED risk they are willing to take, especially given the rents in mara''s area.

i think this thread has been very productive and a learning experience for all of us. i actually hadn''t stopped to think that a person in sales with sporatic but significant income might also be a good candidate for an IO loan: thanks for pointing that out, tanuki.

peace, movie zombie

 

[movie zombie]

re: In Mara''s case, it''s not speculating at this point...it''s reality. The house *has* appreciated 25% in the 2 years she''s been there. That''s a fact.


well, that''s a yes and a no. until she puts the house on the market and sells it, it is not for sure that it has appreciated the 25%. that number is compiled by what comparable houses are selling for in her area right now. however, her house is not on the market. therefore, it still is speculation.

her house will sell for what the market is at the time she places it on the market. that selling price will then determine what her actually appreciation in her home is. that will be fact.

what i''m trying to point out is that you cannot lose money you don''t have. and right now she does not have that 25%. that is a ''paper'' figure.

any amount she sells her home for at the time she sells it less expenses for closing costs, realtor fees, etc. both at the time she bought AND at the time she sells will determine her profit, and then she will be actually able to determine appreciation.

if you don''t actually have the $$$, you can''t lose it. so even if mara sells her house and gets less than 25% appreciation, she will not have lost but have gained....unless of course the market has gone really south and she sells for less than she paid.

i''ve never understood people who think they lost money when they still walked away with more than they paid......

peace, movie zombie

 

[windy1365]

I don''t know much about loans b/c my husband deals with all of that... but I would like to quote his favorite saying...

"Something is only worth what someone else is willing to pay for it."

This can go both ways. Someone might love your house and be willing to pay top dollar for it. Or, someone might just like your house and be willing to pay less than what you are asking.

 

[aljdewey]

Date: 6/11/2005 1:04:09 PM
Author: movie zombie
re: In Mara''s case, it''s not speculating at this point...it''s reality. The house *has* appreciated 25% in the 2 years she''s been there. That''s a fact.


well, that''s a yes and a no. until she puts the house on the market and sells it, it is not for sure that it has appreciated the 25%. that number is compiled by what comparable houses are selling for in her area right now. however, her house is not on the market. therefore, it still is speculation.

her house will sell for what the market is at the time she places it on the market. that selling price will then determine what her actually appreciation in her home is. that will be fact.

what i''m trying to point out is that you cannot lose money you don''t have. and right now she does not have that 25%. that is a ''paper'' figure.

any amount she sells her home for at the time she sells it less expenses for closing costs, realtor fees, etc. both at the time she bought AND at the time she sells will determine her profit, and then she will be actually able to determine appreciation.

if you don''t actually have the $$$, you can''t lose it. so even if mara sells her house and gets less than 25% appreciation, she will not have lost but have gained....unless of course the market has gone really south and she sells for less than she paid.

i''ve never understood people who think they lost money when they still walked away with more than they paid......

peace, movie zombie

Agreed.....none of it matters until she moves on and sells the place she has now. Having said that, since their place has already appreciated 25% in the two years, it''s hard to imagine that any market burst would exceed a 25% drop in valuation.

Given the housing crunch in the area that she lives in and the desirability of the area, I just don''t see a bubble affecting this area more than marginally....I''d more expect a levelling off or a *slight* dip in this area, but not a double-digit drop. As you point out, such factors are the things one considers when making an *educated* risk.

Sure, that''s speculation, too......but I''ll tell you what is NOT speculation.

Had they not purchased this house, they would have blown that money out on rent.......with no chance of appreciation at all. As she pointed out, the amount they are spending in interest does not exceed that which they would have spent on rent AND they have experienced an increase in their quality of life.

As long as any deflation of the market doesn''t drop below the purchase price of the house at the time they sell or refi (which has to be in the next 3 years), they haven''t lost anything.

 

[Dancing Fire]

for the record, i have no problem with Mara and al. they can call me any bad names they want,it doesn't bother me at all.i'm always willing to learn. imagine, if we all knew everything in this world, we wouldn't need any teachers. even to this day i still haven't figured out the good side

of this IO type of loan. i'm must be a DUMMY.

 

[Mara]

mz...i totally agree re not losing out if you sell for more than you bought. as right now we are already more than breaking even due to what we''d be paying in rent for a comparable place..if we sell in a few more years and can realize ANY appreciation, really we have come out ahead.

our worst case scenario if the bubble burst (and we thought about this when we bought), was that we''d sell for basically what we paid...if that happens then we basically paid rent to live in our place for 5 years and realize a nice tax break. i can''t even stress how much we love our townhouse, it''s everything we want in a house (except no yard), and we wish we could just adapt it into a single home so we could stay in it for the much longer term.

since appreciation has been so plentiful up until this point, we feel like we have even a better buffer than we expected, because i would be very surprised if a market correction goes beyond 25%. most experts who agree there will be a burst bubble are estimating much lower #''s. but who really knows, it is a calculated risk. nothing is guaranteed until we sell of course. knock on lots of wood.

one other reason we decided to do 5 year IO was because we were not sure where we wanted to be in 5 years, greg is from the east coast and we have talked about moving, so by doing the 5 year IO, we figured we''d be forced to make a decision in that time period on the next stage in our lives.

as long as someone is educated on the choices they are making and risks they could be taking (as with diamonds just like houses or anything in life) then it can''t be a BAD decision.

 

[Dancing Fire]

Date: 6/10/2005 1:28:42 PM
Author: crankydave

One quick zero down interest only example...

Young couple moving to an expensive area for the short term only. Rental property in the area runs $1200-$1900 a month. They find a modest home and put zero down and acquire a interest only loan that is going to cost them (taxes,expenses, etc. added) $900-$1000 a month.

Here''s what Greenspan had to say yesterday...

http://msnbc.msn.com/id/8160947/

Dave

here''s the perfect example NOT to buy with 0 down IO.because,if the bubble burst right after they buy the house and when the IO period is up, the bank will give him a margin call (in stock term). for example, if they buy a home for $400K, the market drifts lower by 20% during the IO period. by now the house is only worth 320K.the bank will (margin call) ask for at least $80K to cover the loss value of this property.so in this case the couple would of been better off renting. Since every body is saying how good an IO is,i just give you an example on how bad it can be. JMO.

 

[aljdewey]

Date: 6/11/2005 3:06:48 PM
Author: Dancing Fire
for the record, i have no problem with Mara and al. they can call me any bad names they want,it doesn''t bother me at all.i''m always willing to learn. imagine, if we all knew everything in this world, we wouldn''t need any teachers. even to this day i still haven''t figured out the good side

of this IO type of loan. i''m must be a DUMMY.

Also for the record, I have no problem at all with DF either.

And....no inclination to call you bad names, DF.

One of the things I most appreciate about you is that you can disagree on something without taking it personally or as an attack.

I enjoy the back-and-forth that different viewpoints bring; I agree it''s how we all learn. It''s too bad that folks take that personally, but I''m grateful you aren''t one of them. Thanks for what you contribute here!

 

[movie zombie]

aljdewey and mara, i completely agree with everything.

the economy itself will have really tanked for the willow glen area not to hold value of at least what you paid. and given rents in the area, it was a very reasonable decision. it certainly made more sense than continuing to rent! indeed, although i already posted an IO is not the way i''d go, i have to say that if i were in your shoes i could see myself considering it.

the important factor is that you did your research and you know the risks you''re taking. you''ve crunched the numbers. you''ve been realistic that there is a good chance you''ll be relocating. and you''re financially solvent. but i don''t think the majority of IO loans closed are to people who have done what you have and/or are as financially solvent as you and yours.

again, as stated previously, what most of us forget is that we don''t own the home until we pay off the bank. and it is possible to go through foreclosure and still owe the bank $$$. i saw this in the 80''s and i''m afraid it could be possible again. remember readers: the note we all signed was for the value of the house at the time we bought it. and as the wise man above said: "Something is only worth what someone else is willing to pay for it." therefore, if the market busts and my home is worth less than the note, i get to pay the difference.

the mere act of living is risky...why should real estate be any different?!

peace, movie zombie

 

[Mara]

i totally agree movie zombie..

DF again, no one is saying 'ALL IO' is good, that's a bit of an overstatement. i think that it should be considered on a case by case basis.. it's obviously not something you will be considering. however, not everyone who considers it is foolish and/or ignorant of the risks that are out there.

that is all that is being said. nothing is ALL GOOD or ALL BAD...there are always those shades of gray.

for me, clarifying IO's is imporant and not because i have to justify what we did. there is alot of bad press out there regarding IO thanks to the tons of people who are doing it the not-so-great way, and alot of people are not aware of what it entails and are just prone to say 'oh those IO's are just horrible..did you see that piece on it in the news?!'

education is key. no name calling required.

 

[websailor]

I found something that might be of interest to this topic so I''m posting it. It came from the Silicon Valley Real Estate Report site. As you all have been talking about, it does illustrate that the real estate market has it''s ups and downs. Hope this helps!

 

[Dancing Fire]

Date: 6/11/2005 4:05:56 PM
Author: movie zombie

again, as stated previously, what most of us forget is that we don't own the home until we pay off the bank. and it is possible to go through foreclosure and still owe the bank $$$. i saw this in the 80's and i'm afraid it could be possible again. remember readers: the note we all signed was for the value of the house at the time we bought it. and as the wise man above said: 'Something is only worth what someone else is willing to pay for it.' therefore, if the market busts and my home is worth less than the note, i get to pay the difference.

the mere act of living is risky...why should real estate be any different?!

peace, movie zombie

it happen in our area between 91-96.the housing market just kept difting lower,during that period of time.the problem with a lot of first time home buyers is... they haven't been through the down cycle .

the bad news with housing going up too quick is that if a home owner wants to upgrade ,the new homes they're looking at also have gone up enormously. another bad news is,a lot of people are taking out home equity to purchase big ticket items (cars & boats) and every month there's that extra payment to carry on their back.the housing bubble is putting a lot of people in BIG debt.they just don't know it.

 

[movie zombie]

DF, i know your example well as my in-laws have used their home as a ''cash cow'' for years. it should have been paid off 20 years ago. instead they''ve got a huge loan payment, a larger note than what they originally bought the home for, have deferred maintenance so that when they do sell they won''t get top dollar, and all this as they''re nearing retirement. the repeated refi''s were to payoff credit card debt. btw, they managed this all on conventional loans and in australia!

again, i think this has been a very useful thread despite the high running emotions and heated statements...after all, when discussing $$$ [or politics

] these things do tend to happen.

i''ve learned that i would consider an IO if i were a sales person with good income but irregular payment. i''ve also learned that there are other people like Mara who have taken the time to become educated and make decisions after looking at all the risks, which in reality is no different that what you and i did when we went conventional!

i don''t think i''m wrong when i say that i think the concern is that those we know, even if it is through a pricescope forum, have adequate information to make informed decisions and perhaps not repeat mistakes we or those we know have made. admittedly i am no fan of IO loans but i do think they are appropriate for some people some of the time....and Mara is one of those people.

good luck to all you home buyers out there! and good luck to you sellers, also!

peace, movie zombie

 

[Dancing Fire]

Date: 6/11/2005 10:14:26 PM
Author: movie zombie
DF, i know your example well as my in-laws have used their home as a 'cash cow' for years. it should have been paid off 20 years ago. instead they've got a huge loan payment, a larger note than what they originally bought the home for, have deferred maintenance so that when they do sell they won't get top dollar, and all this as they're nearing retirement. the repeated refi's were to payoff credit card debt. btw, they managed this all on conventional loans and in australia!

yeap...don't let a 15 yr conventional loan turn into a 25-30 yr loan by doing refi's every 3-5 yrs.if you going to refi into a lower rate,make sure to pay it off in (15 yrs total) from the day you first purchase the house. example...say you bought a house today 2005 and 3 yrs from now you do a refi,after the refi try to pay the loan off in 12 yrs. for a total of 15 yrs. and don't take extra money out to buy a new car because of tax deductable on interest.(i can see al & Mara rolling their eyes.

)

i have a friend that kept refinancing their loan and every time they took out extra cash. and after living in this house for 18 years, he now owes the bank more than his original loan.

 

[cflutist]

DF, I aspire to be like you and to have my home paid off in 4.5 years (been paying an extra $3000 to principal every month). LTV is only at 15% right now. Only then can I start to think about early retirement and building our vacation home on the California coast. I just don''t want a mortgage to worry about during our retirement years.

I have friends like yours who keep refinancing and pulling cash out too. I also had co-workers (dual income IT professionals) that walked from their homes during the mid 1990s because they owed the bank more than their homes were worth. My own home dropped $50K during that time and thank god I didn''t have to sell then. I even went to the county assessors office to have my home reassessed so my property taxes would be lower.

As far as the bubble bursting? Who really knows, only time will tell.

 

[Dancing Fire]

Date: 6/11/2005 11:52:30 AM
Author: aljdewey


A further note on this: As long as the bank owns ANY percent of the house, you do not have 'ownership'....you have equity.

Ownership doesn't occur until the deed is transferred over to you entirely, and that doesn't happen until the house is 100% paid off. As such, it doesn't matter WHAT percentage of the principal you've paid down.....you still don't have any *ownership* until the principal is paid in full.

guess what is in my safety deposit box?.

 

[Mara]

DF...why would you think I am rolling my eyes at you when you say don''t take equity out to buy a new car? My car is 12 years old...I''m not exactly into buying random new cars at the expense of my home equity. Just because we are doing an IO short-term does not mean that we are foolish with our money...I would love it if you would stop making assumptions on how we manage our finances based upon the one thing you know about us.

 

[Dancing Fire]

Date: 6/12/2005 2:47:23 AM
Author: Mara
DF...why would you think I am rolling my eyes at you when you say don''t take equity out to buy a new car? My car is 12 years old...I''m not exactly into buying random new cars at the expense of my home equity. Just because we are doing an IO short-term does not mean that we are foolish with our money...I would love it if you would stop making assumptions on how we manage our finances based upon the one thing you know about us.

because of the tax deduction on interest paid.which is another thing that i don''t like. i would only get back a fraction on interest paid from uncle sam.on the avg....$1 on interest paid, 30 cent in return. that just don''t add up in my book. JMO

 

[moremoremore]

I basically skimmed here but I just wanted to say that in my opinion, real estate is the safest investment there is. There is much more risk in other ventures. And I would say it is unusual to hear of someone's house to go down in value than up...provided they didn't pay an incredibly inflated price b/c they *had* to have it...in which case it would have appraised for less by the bank and they couldn't have obtained a large enough mortgage to buy it in he first place unless they had the $ already.

And who the hell CAN afford a home these days? My parents came from Poland as immigrants and bought a home they could not afford...well, 30 years later, it's safe to say they made their $5000 back LOL

Hubby and I were recently reappraised which uses comp sales as the largest factor in the appraisal and the coop has appreciated about 50% and we only spent about 10 grand in improvements I would say. Not bad for living here for 1 1/2 years...there's always a market for housing here in nyc !

 

[fire&ice]

Date: 6/12/2005 8:32:06 AM


We have about 80% equity in our home, and more than enough money to pay it off completely. A few years back I refinanced, and locked 4.50% for 30 years. I can choose to pay off the loan at any time but 4.50% is likely going to be the cheapest money I''ll see in my lifetime. I have averaged a bit over a 10% return on that money the past few years. So you see, paying off your home or paying it off early in a time of ''cheap'' money would not be the wisest choice. JMO

Dave

He doesn''t seem to grasp the concept of "opportunity costs" with the money left in the house. That''s fine. But, it''s a basic economic principle.

Also, aren''t IO loans subject to the same freddie mac/fannie mae guidelines? Does the bank have the right to call an IO loan (providing you are making the payments on time)? And, on the bank/mortgage company side of things - why would they call the note? First, they are making money on you in the form of interest. Second, they have the mess of having a property valued at less in the immediate. Make no sense.

 

[aljdewey]

Date: 6/11/2005 11:34:20 PM
Author: Dancing Fire
yeap...don''t let a 15 yr conventional loan turn into a 25-30 yr loan by doing refi''s every 3-5 yrs.if you going to refi into a lower rate,make sure to pay it off in (15 yrs total) from the day you first purchase the house. example...say you bought a house today 2005 and 3 yrs from now you do a refi,after the refi try to pay the loan off in 12 yrs. for a total of 15 yrs. and don''t take extra money out to buy a new car because of tax deductable on interest.(i can see al & Mara rolling their eyes.

)

Actually, DF, no.....you cannot see me rolling my eyes on that one, because I''m not a believer of doing re-fis on conventional loans.

I know people who''ve done them a few times.....and what they don''t know is that every time you re-fi, it''s like starting the clock over again. Because of the way loans are structured, more of the interest is paid up front. If you get a rate of 5.62 on your mortgage, that is the rate over the life of the loan....but if you keep doing refis every 3-4 years, you''re actually paying closer to 18-22% interest because you''re absorbing the highest interest period.

We pay cash for our vehicles, and we don''t charge anything that we cannot pay off in full at the end of every month. I wouldn''t extract equity from my home to pay for purchases that depreciate.

 

[aljdewey]

Date: 6/12/2005 3:14:06 AM
Author: Dancing Fire

Date: 6/12/2005 2:47:23 AM
Author: Mara
DF...why would you think I am rolling my eyes at you when you say don''t take equity out to buy a new car? My car is 12 years old...I''m not exactly into buying random new cars at the expense of my home equity. Just because we are doing an IO short-term does not mean that we are foolish with our money...I would love it if you would stop making assumptions on how we manage our finances based upon the one thing you know about us.

because of the tax deduction on interest paid.

Because of the tax deduction? How about just pay for the car outright....then there IS no interest to worry about deducting.

 

[aljdewey]

Interesting quote about adjustable mortgages from Greenspan.....one you should read, DF.

“To be sure, these financing vehicles (adjustable rate mortgages) have their appropriate uses,” he said. “But to the extent that some households may be employing these instruments to purchase a home that would otherwise be unaffordable, their use is beginning to add to the pressures in the marketplace.”

Essentially saying the same thing others have been saying here all along........that there are instances and circumstances that make I/O loans a smart choice, but there are also instances (such as buying a house intended as a long-term purchase that you couldn''t afford to make monthly payments on under a conventional mortgage) that make them bad choices.

 

[Dancing Fire]

Date: 6/12/2005 8:32:06 AM
Author: crankydave

Date: 6/11/2005 3:58:46 PM
Author: Dancing Fire

Date: 6/10/2005 1:28:42 PM
Author: crankydave

One quick zero down interest only example...

Young couple moving to an expensive area for the short term only. Rental property in the area runs $1200-$1900 a month. They find a modest home and put zero down and acquire a interest only loan that is going to cost them (taxes,expenses, etc. added) $900-$1000 a month.

Here's what Greenspan had to say yesterday...

http://msnbc.msn.com/id/8160947/

Dave

here's the perfect example NOT to buy with 0 down IO.because,if the bubble burst right after they buy the house and when the IO period is up, the bank will give him a margin call (in stock term). for example, if they buy a home for $400K, the market drifts lower by 20% during the IO period. by now the house is only worth 320K.the bank will (margin call) ask for at least $80K to cover the loss value of this property.so in this case the couple would of been better off renting. Since every body is saying how good an IO is,i just give you an example on how bad it can be. JMO.

We have about 80% equity in our home, and more than enough money to pay it off completely. A few years back I refinanced, and locked 4.50% for 30 years. I can choose to pay off the loan at any time but 4.50% is likely going to be the cheapest money I'll see in my lifetime. I have averaged a bit over a 10% return on that money the past few years. So you see, paying off your home or paying it off early in a time of 'cheap' money would not be the wisest choice. JMO

Dave

dave
if you can get 10% return on your money

you got to do it.

 

[Dancing Fire]

Date: 6/12/2005 12:36:15 PM
Author: aljdewey

Date: 6/11/2005 11:34:20 PM
Author: Dancing Fire
yeap...don''t let a 15 yr conventional loan turn into a 25-30 yr loan by doing refi''s every 3-5 yrs.if you going to refi into a lower rate,make sure to pay it off in (15 yrs total) from the day you first purchase the house. example...say you bought a house today 2005 and 3 yrs from now you do a refi,after the refi try to pay the loan off in 12 yrs. for a total of 15 yrs. and don''t take extra money out to buy a new car because of tax deductable on interest.(i can see al & Mara rolling their eyes.

)

Actually, DF, no.....you cannot see me rolling my eyes on that one, because I''m not a believer of doing re-fis on conventional loans.

i think refi is ok as long as you don''t start over.say if you do a refi on a 15 yr loan that has 12 yrs left,after the refi ,make sure you paid it off in 12 yrs.

We pay cash for our vehicles, and we don''t charge anything that we cannot pay off in full at the end of every month. I wouldn''t extract equity from my home to pay for purchases that depreciate.

 

[Dancing Fire]

Date: 6/12/2005 11:54:20 AM
Author: fire&ice

Date: 6/12/2005 8:32:06 AM


We have about 80% equity in our home, and more than enough money to pay it off completely. A few years back I refinanced, and locked 4.50% for 30 years. I can choose to pay off the loan at any time but 4.50% is likely going to be the cheapest money I''ll see in my lifetime. I have averaged a bit over a 10% return on that money the past few years. So you see, paying off your home or paying it off early in a time of ''cheap'' money would not be the wisest choice. JMO

Dave

Also, aren''t IO loans subject to the same freddie mac/fannie mae guidelines? Does the bank have the right to call an IO loan (providing you are making the payments on time)? And, on the bank/mortgage company side of things - why would they call the note? First, they are making money on you in the form of interest. Second, they have the mess of having a property valued at less in the immediate. Make no sense.

as i understand it, after the IO period ends. you are required to switch over to a conventional loan. during this IO period if the home value goes down 20% i would assume the bank will ask you to come up with the money to cover lost value on that property. no bank would loan you 500k on a property that has a value of 400k. i think.

 

[partgypsy]

I find the real estate discussion very informative and illuminating. I guess I am old fashioned because initially I would agree with Dancing Fire that IO loans are not a good idea, making more acceptable the idea of buying more home than one can afford, and the prospect of actually losing money when the time came to sell the house. However hearing Mara''s story I can see they can be actually useful in some situations, such as when one would be spending the same or more in rental costs with no possibility of appreciation.
I do have to warn of one drawback with alot of loans that are intended to be held for only 5 years and then interest rates are adjusted. This is not only IO but balloon, adjustable, etc loans. We are friends with a couple that took one of these out thinking they would not be staying in the same area in 5 years (hey that''s such a long time from now), but now that 4 1/2 years has passed, they are coming to the point they either have to sell and move or pay significantly more in interest. It is stressful on them to be forced to make such big decisions on their lives simply because of the type of type of loan they have taken out. One may think one is only staying in the house for 5 years, but circumstances may change.

 

[jenwill]

Date: 6/12/2005 7:54:23 PM
Author: Dancing Fire
as i understand it, after the IO period ends. you are required to switch over to a conventional loan. during this IO period if the home value goes down 20% i would assume the bank will ask you to come up with the money to cover lost value on that property. no bank would loan you 500k on a property that has a value of 400k. i think.

The switch from IO to Principal plus interest is built into the original loan- so no, the bank doesn''t re-evaluate the value of the home.
Once you have the original loan, which can be 5/7/10 years IO at say 5.25%, then after 5 years switches to either a 10/15/25 year fixed or variable rate depending on what you were able to qualify for at the time of the original loan. So, at the end of your IO, the payment jumps up to include the interest, plus some money towards the principal.

My friend just refi''d to get IO for 5 yrs, her payments are $1850/month. When the 5 years is up, her payment will jump to $2650/month. Nothing needs to be done at the time, except to may more per month.

This works well for her, as when she bought 2 years ago, at $415k she was just squeaking into the payments, but now, she has had salary raises and expects more in the future, her condo has appreciated (at least according to comps) to $635k. So best case scenario, she is already (now) easily able to afford payment increase, worst case, she has to sell with appreciated property value. Even if the housing prices drop 30% she is still doing ok because she would have paid that much in rent, with no write offs. But realistically she will make money from this purchase.

If she had waited to save until she could have 20% and standard loan, she would be further away from purchasing now than she was 2 years ago.

 

[fire&ice]

Date: 6/13/2005 2:56:06 PM
Author: jenwill

Date: 6/12/2005 7:54:23 PM
Author: Dancing Fire
as i understand it, after the IO period ends. you are required to switch over to a conventional loan. during this IO period if the home value goes down 20% i would assume the bank will ask you to come up with the money to cover lost value on that property. no bank would loan you 500k on a property that has a value of 400k. i think.

The switch from IO to Principal plus interest is built into the original loan- so no, the bank doesn''t re-evaluate the value of the home.
Once you have the original loan, which can be 5/7/10 years IO at say 5.25%, then after 5 years switches to either a 10/15/25 year fixed or variable rate depending on what you were able to qualify for at the time of the original loan. So, at the end of your IO, the payment jumps up to include the interest, plus some money towards the principal.

My friend just refi''d to get IO for 5 yrs, her payments are $1850/month. When the 5 years is up, her payment will jump to $2650/month. Nothing needs to be done at the time, except to may more per month.

Thanks Jenwill. I thought so. Mortages on houses are really protected as long as you make your payments & don''t change the property description.

And, your second point brings up a good point, especially for younger people. Your salary will more than likely increase.

 

[Bagpuss]

Let me say firstly that I haven''t read all the replies on this subject but I''d thought I''d put in my 2 cents worth anyway.

We bought our first house (in the UK, in the 1970''s) with a short term IO loan from a private individual. After five years, we sold at a VERY good profit and repaid the loan in full. We did this because at the time we were both students and the big lending institutions wouldn''t consider lending to us, but this person trusted us and so did lend us the cash. We went on to buy subsequent houses with ''normal'' mortgages, but buying that first house set us up for life.

Of course, you have to take into account your own circumstances, the housing market etc ect, but IMHO, you should never say never. It worked for us.