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

[Dancing Fire]

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.

.

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.

what happens if the couple don''t qualify for the higher payment,after the IO period is up? i know there would be no problem if the market keep going up but, what if the market drifts lower during the IO period.

 

[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.

DF, she answered the question. QUALIFY FOR AT THE TIME OF THE ORGINAL LOAN.

Boy, you are far worse than I am when my husbands says "you look for metorites hitting the house".

 

[jenwill]

Date: 6/13/2005 7:36:48 PM
Author: Dancing Fire
what happens if the couple don''t qualify for the higher payment,after the IO period is up? i know there would be no problem if the market keep going up but, what if the market drifts lower during the IO period.

DF-

She doesn''t HAVE to qualify. It is the exact same loan, the terms have just morphed into Principal plus interest. Now, if you are asking, what if she couldn''t afford those higher payments? Luckily she can. But if she wasn''t able to, and the market dropped MORE than 30%(as of now, prob would have to drop 50% by the time her higher payments come due) so she couldn''t sell and pay off her loan, then I guess she would have to get a roomate in to help with the payments. There is always a way to get things done. It may not be the way one initially desires, but there is always a way.

Basically she would have to hit a trifecta of very bad luck to not be better off than if she hadn''t purchased 2 years ago with IO loan.

Once a bank gives you a loan, they leave you alone as long as you are paying on it. You don''t have to refi at end of IO, they do not check property values and call in loan if property value to loan ratio changes for a negative. They do NOT benefit if they call in that loan- basically they would be forcing you to default, and they would be left with a house to try to sell in an extremely bad market (which is what it would have to be for the value to drop so drastically) which would end up with them losing money. As long as you are paying, they are making money. Only if the owner is forced to sell does anyone realize a loss.

 

[MissAva]

http://moneycentral.msn.com/content/Banking/P49733.asp

 

[movie zombie]

matatora, good article and a good point re refi and rising rates moving fast when they finally do start to move up. peace, movie zombie

Date: 6/13/2005 8:36:12 PM
Author: Matatora
http://moneycentral.msn.com/content/Banking/P49733.asp

 

[Dancing Fire]

Date: 6/13/2005 8:01:06 PM
Author: jenwill

Date: 6/13/2005 7:36:48 PM
Author: Dancing Fire
what happens if the couple don''t qualify for the higher payment,after the IO period is up? i know there would be no problem if the market keep going up but, what if the market drifts lower during the IO period.

DF-

She doesn''t HAVE to qualify. It is the exact same loan, the terms have just morphed into Principal plus interest. Now, if you are asking, what if she couldn''t afford those higher payments? Luckily she can. But if she wasn''t able to, and the market dropped MORE than 30%(as of now, prob would have to drop 50% by the time her higher payments come due) so she couldn''t sell and pay off her loan, then I guess she would have to get a roomate in to help with the payments. There is always a way to get things done. It may not be the way one initially desires, but there is always a way.

all the interest rates are lock in? including the variable rates?

 

[lostdog]

"the economy itself will have really tanked for the willow glen area not to hold value of at least what you paid"

The downward spiral feeds itself. I can think of many people who learned this the hard way in Southern California in the early nineties. Large fractions of appraised value can disappear quickly. There is a lot of upward pressure right now, fed by interest rates, expectations, and blooming equity. Add to that the post-dot-com perception of real estate as invincible.

And the consequnces of a moderate (let's say 20% or 25%) step backwards coupled with higher interest rates would be huge. As pointed out, the cash feeding the economy in the form of consumer spending, which was the engine that pulled us out of the recent "it's not a recession" recession-like mode, would dry up. Do we get that hard landing or a more gradual cooling off? A slowing economy might not crash real estate, but slowing real estate might crash the economy.

I can't see what the arm-wrestling over IO is really about here. It's a tool and depends on what situation it is applied to. The average homeowner tenure is something around 4 years now, was 7 years about a decade years ago. Most people don't stay in a house long enough to build equity from loan payments that amounts to much. Equity mostly comes, if it comes from anywhere, from price appreciation. (And it's not a guarantee, despite what RE agents will attempt to quote you about history and averages.)

IO for the life of the loan? For many people it would be a great thing. For investors almost more so. Lifetime IO is quite an incentive.

IO for a limited term is a bet on forward interest rates. Since we are at unusual lows, it seems like a bet that would be painful to lose. Limited term IO with a lock, more likely a cap, on the permanent rate is at least a known situation. I think those are rarer, or at least mortgage converts more like to an ARM, which also has a cap.

The argument might be that if you can't afford a property with a conventional loan, maybe you shouldn't be buying it with a loan that gets you in now but will convert to a loan you might not be able to afford. IO and balloon arrangements make more sense in a high interest rate enviroment, but the leverage IO gives you when prices are spiking can be darned attractive too. (Guess what negative leverage looks like? )

(Also, some of the discussions appear to have been talking about Interest Only as if it also meant Zero Down Payment, two different things).

Anyway, a home isn't usually the best investment people can make, just the best or biggest one that people usually do make. With prices jumping 15-20% or more each year, right now, you don't have to be a genius to make significant money in real estate. You didn't have to be very smart about technology to make money in dot-com stocks, either.

As I said in one of the other IO threads, the biggest thing to note about IO's popularity is that it is a symptom of more and more money being piled into the real estate market. People will do anything to control property right now, as they can't see how theey could possibly miss. And after watching stock investments plummets (thiers or somebody else's), people are more willing to channel larges amounts into real estate. IO lets them control much more real estate, pricewise. When we look back on why prices didn't keep going up and up, but bucked the realters oft-cited endless upward march hype, it will be another sign everybody swears they saw as a red flag. But for now, onward and upward. Keep buying condos in Miami.

No money down doesn't hurt the borrower. At least by itself. It can hurt the lender,
because the foreclosure rate is higher because the buyer has very little disincentive to walk away and the lender can't recapture anything out of equity. 20% down isn't a policy meant to protect borrowers. It has nothing to do with what you can "afford".

It can happen though, that a huge drop in house prices can put you in technical default (there's another term for it I can't remember). Now the bank has no incentive to try to take away a house that's now worth less than the amount they loaned out against it, and the lender usually wouldn't worry about reposession. The threat to the borrower is that they are paying off a mortgage on a house they can't easily sell, and the equity they put in has vanished. Not a huge threat if they can make the payments and don't have to sell or refinance before values recover, which hopefully they do after a period of years. But if they sell the house at a loss they either still owe the bank the difference or, if the bank forgives the difference, it counts as income. So then the market, which realters tell you goes up and up and up, is composed of people who can't sell their house, so they can't buy your house. Markets are cyclic, all of them.

IO can be a great tool for a responsible buyer. Credit is dangerous thing for a less than responsible buyer. Easy credit even worse.

The big question is what it would take to crash housing prices? 25% or more off. Can it happen?

 

[Momoftwo]

But, remember with the so called "crash" of the 80''s, it only lasted a couple of years. So, as long as you can make the payments, you make it through. I think the bigger issue here is some people panic when they dont'' see a 10% profit a year. Avg (normal) increase in home values is actually more like 2-3% a year in good markets. Then, you''ll see a jump at some point and a readjustment. That does not mean that prices will drop, just level off as less people are in the market at certain price ranges. Also, the increase in interest rates is estimated to be up to less than 8%. That is nothing. After the early ''80''s when rates hit 18%, there were more restrictions and the Fed watches the market closesly. I know the Fed doesn''t control Mortgage rates, but they do cotrol the prime rate which affects inflation, which in turn affects mortgages to a certain extent. We''re not likely to see rates jump that high ever again. Even when they were high, people managed to hang onto their homes and buy new ones. We bought our first at 15% and only made $500 3 years later, but we were able to itemize and I wasn''t paying someone else rent for their house. Rent is like pouring money down the drain. There is no return at all, ever! Everyone has to do what they''re comfortable with. Some are comfortable paying 35-40% of their income to a mortgage and others prefer to pay less. It''s a choice, but not ours to make for anyone else. I''ve been in situations where our mortgage was 28% of our income and situations where it was 15%. The only difference was we had more disposable income to buy crap with.

 

[fire&ice]

Date: 6/14/2005 5:53:39 AM
Author: Momoftwo
The only difference was we had more disposable income to buy crap with.

This nearly made me spit out my coffee. Gosh, it is true. It''s funny - the older I get the more I start calling "stuff" CRAP. I''ve been going through the house & really scaling back "crap" for an upcoming yard sale. Really - do I need three silverplated bread trays? The only things I treasure these days are our Art - it''s still beautiful to look at - & things that make me comfortable like a set of great sheets. I digress.

Anyway, my final (maybe not final) thought on this whole issue is that, in most instances, home ownership makes sense in the bigger picture long run. All finance options have their pluses and negatives. One should evaluate what works best for them. Also, with our re-fi''s, we adjusted the payment structure to reflect how many years into it. Interest rates are at an historical low.