Interest only Mortgages

[msparks]

quote:

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Originally posted by JHZR2:
Pay anymore than the minimum interest payment, and Im doing better than renting.


Thanks again for the advice!

JMH

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You want my advice? Here is what I would do. Scrap the car. Get rid of it and buy a 3-5 thousand dollar one. Put all of your payments in the bank.

Next it sounds like you really want to live in this area. Well you are taking a bet that if you buy or get into a house now, you will be better off, than trying to find one 3-5 years from now.

So what I would do, is get the house. Be sure that the loan is allow to add extra to the monthly payment. As your income increases bump up that payments. Say your are making a $1000 a month now. It would be nice to add another $1000 to that. Over 36 months you would have paid down $36,000 on the house. Now when you go to refi(as your income increases, keep that payment up try to get a 15 year or 20 at the most. Get that thing paid off!!

I would say your idea is a good one, but you have to become disiplined, you have to live way below your means, AND GET RID OF THAT CAR!!

Order this book:
The Total Money Make Over

 

[Schmoe]

Dude, don't be dirt poor and house rich. Also, you are putting a LOT OF FAITH into the unknowns. Say you and your girlfriend don't get married....$hit happens. Then what? What if the market goes to #ell? I've been reading a lot of stuff about how house prices are overinflated. Your still young, start off simpler. You don't need the big 'ol house yet. Also, you just started working and fresh out of college. Most people will change jobs 3 to 4 times before they are comfortable. Again, your assuming you'll be happy working where your at for the next ump-teen years. Economy right now isn't the best and assuming you'll have that particular job in that particular area isn't really something I'd bet the bank on at this point in your life. I'm sorry, but you GOT to think ahead.....you get the house, you get married, marriage just doesn't work out.......she get's HALF of everything and then godforbid if you have kids. You have to look out for number one sometimes.
Get a smaller house, something that you can well afford and have money left over. You still got to live.
I would go with a conventional loan regardless, as others have said, the first 20 plus years is dang near interest already. You may be able to itemize and deduct that interest from your taxes, but they have recently raised the standard deductible. If you get married, it goes up even higher so you may not be able to do that. Don't pay points if you don't have to, again, look at your itemization potential. You always hear something like you can deduct your points off your taxes, but that is not always so cut and dry.
Does it have to be a house? Look at condos too.
One other thing...in addition to the house payment you have to look at what your "extra" costs are going to be....property taxes and insurance. Those two seem to go up every year and don't think the place you'll be living won't have a problem raising property taxes if the market continues to climb. Everybody wants a piece of the action.

[ January 25, 2005, 10:35 AM: Message edited by: Schmoe ]

 

[Ray Garlington]

quote:

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If I get an interest only loan, the payment on a HUGE amount of money would be quite low, enough that I could have a SUBSTANTIAL amount of free cash each month after paying my loan on a 300k mortgage's interest.

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You seem to have a fairly good financial plan, and if you can find the house you want, go for it. Therein lies a potential problem. You need to find someone who will actually loan you the money you need and they have tight guidelines. It pretty much boils down to income vs. debt load. Are you sure someone will actually broker the loan you are dreaming about?

 

[JHZR2]

Yes, I was cleared for a $300K 80/15/5 (mortgage on 80%, Home equity loan on 15%, 5% down cash, thus getting rid of PMI payments) loan back in the spring, and my income has gone up almost $10k since then.

msparks: wow, youre really against having a new car! You'd probably hate it that I actually have 3: a 98 chevy truck my parents bought new for me when i got my license, a 91 BMW that I rebuilt from flood status for fun, and my 04 saab, which I got a killer deal on, put a truckload down, and just have a small payment on. Sure theyre depreciating assets, but within a year all three will be mine 100% (I currently own 2 of 3 completely), and having 3 reliable cars, I wont have to look for a replacement any time soon. I put over 50k/yr on, so its nice to have more than one.

I have to wonder about your quote though regarding debt as a way of life:

quote:

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This is only becuase it's the way people think. I feel that if folks start changing the way they look at it. There would be no need for ANY debt.

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I dont believe in holding credit card debt, but the way I look at it, regarding buying homes, there is no option. Even if $100k homes were plentiful, not many people would be able to buy one in any reasonable amount of time without a mortgage. And, all that time that they would be renting or doing whatever else, they would just be throwing away their money. That doesnt seem like the best thing either. I chose to take a small loan and buy a new car for piece of mind and for comfort, due to all the miles I drive (it gets 34+ MPG and sits my large-build 6ft 4" person very comfortably). I also made a structured plan to pay the rest of the balance off VERY quickly, and I am following that through very nicely. The total interest Ill pay is quite small, so it wasnt such a bad thing.

Of course I wouldnt take a $28k loan on a $30k car and think its smart. But what I did, getting a $28k car for $23k, end of model year, brand new, and holding a loan of less than a third, paying it off right away isnt that bad, in fact it seems to work well (I believe that buying a new car, and owning it long-term, well over 10 years is the only way to get economy out of a vehicle, and Id rather have full history from the beginning, rather than someone else's headache). thus my belief in the potential successes of 'alternative' financing schemes like the home loans I started on this thread

Of course I see the strong points towards just sticking with a conventional loan. But then again it comes back to generating a 20%+ down payment and getting into something sooner rather than later, which is no small feat to get a reasonable place.

Thanks again for all the input!


[ January 25, 2005, 12:19 PM: Message edited by: JHZR2 ]

 

[Schmoe]

Seems like you already talked yourself into it my friend. Good Luck!!!!

 

[msparks]

quote:

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Originally posted by JHZR2:
msparks: wow, youre really against having a new car! You'd probably hate it that I actually have 3: a 98 chevy truck my parents bought new for me when i got my license, a 91 BMW that I rebuilt from flood status for fun, and my 04 saab, which I got a killer deal on, put a truckload down, and just have a small payment on.
Thanks again for all the input!

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I'm not against buying a new car. Just against in spending more than 25% of your annual income on a depreciating asset. If you made 92,000 per year a 23,000 car would make sense.

If you make 30,000 per year and spend 23,000 that wouldn't make sense (I don't always follow what I believe and have just developed this in the last few years. So my 1997 F150 is going to be with me for a long time. Until I can buy another New(or newer) car that I like at 25% of my yearly income.

Another though is that if you make $50K per year. owning a $200,000 house shouldn't take more 5-10 years to pay off. If you put 50% of your income towards that house it would be paid off in no time flat.

Can you imagine how much stress would be taken off individuals that had no debts including the house? You would probably live an extra 10 years with this type of philosophy. Not to mention retire at age 50 instead of working until your 70. Who wants that? Not me thanks

 

[JHZR2]

quote:

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Originally posted by Schmoe:
Seems like you already talked yourself into it my friend. Good Luck!!!!

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Yeah but I talk myself in and out of things. I dont know why my brain works this way, but I guess its a thought exercise of sorts that allows me to really plan and really learn too.

There are a lot of good points here though, so have to play it by ear and see how life takes me. And, find that perfect house of course. Id also of course need to research how fast mortgage rates have increased in the past, so that I could validate any exit strategy.

Does anyone know if its possible to do something like a 10% down, 10% home equity, 40% mortgage 1, 40% mortgage 2? Other than the fees upfront, it may allow for a creative way of getting into a property and managing monthly payments, by using different financing setups. Most people wouldnt do this because of the extra work involved, Id guess... But is it possible?

Thanks!

 

[JHZR2]

quote:

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Originally posted by msparks:
Just against in spending more than 25% of your annual income on a depreciating asset. [/QB]

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That 25% of salary is an excellent rule. Ill bet that my parents used more like a 10% of salary rule, as they always bought (new) economy cars to saveon upfront costs and on fuel. At the same time they purchased and paid off two weekend/vacation homes in less than 15 years.

Im just curious about your thinking regarding generating the 25% of one-year's salary. I mean, if you keep the car a while, which is the only way to eek out economy from a vehicle, it depreciates year after year, not all at once. Depending on the car, you will have some residual cash-out at the end when you sell it anyway. Further, if you found a good finance deal, like 0%, it would be worth it to take advantage, even if you keep your money in say, ING Direct, making 2.35%, or in I-bonds. But with a 0% car loan, sure youre upside-down at some point in the loan timeframe, but you can also break up the cost over the life of the loan, so 5 years at 0% would really make the car's price only 20% of its final cost, per year. So, wouldnt good financing allow you to get a more expensive car, without worries, if youre planning to keep it for the long-term?

What I mean is, say I make $40k, and buy a $10k car (this makes the numbers simple). If I finance it at 0% for 5 years, in reality, Im doing the same as buying 5 cars at 5% of my yearly salary, which to me seems pretty safe. Sure I'd have the payment year after year, but the cost is minimal, and I'm making money (or at least hopefully pacing inflation) at the same time, then I'm buying a depreciated car in the future with less valuable dollars. Depreciation expectations were already built into the long-term plan, and so in real terms, I may come out with a few bucks extra at the end.

OK, maybe Im just complicating things too much

Thanks again!

 

[darryld13]

I can reasonably guess who here were traumatized by Volker's battling of inflation in the early '80s. Mortgage interest rates rose incrementally to an unfathomable 20+%, crushing homeowners who bought homes using ARMs (aka Automatic Reaming Machines) on the premise that interest rates weren't going to go higher, only to find out annually that they could and did. It wasn't as ugly as the Recession, but the lessons were as lasting. Anything other than a conventional fixed rate mortgage is speculation on the future, either on the Fed, inflation, the job market or the housing market. Buy what you can comfortably afford now that doesn't depend on changes in the future, like pay raises or interest rate drops. You can always be in a position to take advantage of any great deals in the future if you haven't already mortgaged the future away.

[ January 25, 2005, 04:36 PM: Message edited by: darryld13 ]

 

[XS650]

Daryl, I rode out the 80s with a 1972 7% FRM (F*ck Rising Mortgage rates

) . I did have a couple of friends who had to sell their houses because they couldn't meet rising ARM rates. Naturally, the rising rates simulatenously put a damper on the real estate markets so they got hurt that way too.

The low rates of the past 4 years are just blips on the radar. Anyone who thinks our deficit spending isn't going to run the rates back up is welcome to buy a large orange suspension bridge just north of San Francisco that I own.

[ January 25, 2005, 04:41 PM: Message edited by: XS650 ]

 

[Al]

quote:

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Originally posted by Schmoe:
Dude, don't be dirt poor and house rich. Also, you are putting a LOT OF FAITH into the unknowns.

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I like the way you think. You must be my long lost brother.

You made a lot of points that if young people took-forclosures would be rare. The only certain thing about the future is that it is very uncertain.

 

[msparks]

quote:

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Originally posted by JHZR2:
Im just curious about your thinking regarding generating the 25% of one-year's salary. I mean, if you keep the car a while, which is the only way to eek out economy from a vehicle, it depreciates year after year, not all at once. Depending on the car, you will have some residual cash-out at the end when you sell it anyway. Thanks again!

JMH

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The way that I would do it is if say after 4-5 years and I wanted a new car, I would take the sale value(or trade in about) subtract that from the the deal, then use that left over amount for my 25%.

so say you have negotiated a deal on a 30,000 car down to 23,000. But you have 12,000 worth of value left in your current car. so you sell or trade in and now bring that amount down to $11,000.
So you are still within your 25% rule, on a new car that you plan to keep at least 5 years or so. When you do that again, you might be making 50,000 or 60,000 and you can do it all over again. But once you are "ahead" of the game it makes it very easy.

Problem is most folks buy more car than they can afford, therefore they will always have payments becuase they can never get out from being upside down. (Unless they sell their current car at a loss pay off the difference and drive a $2000 clunker until they can do the 25% rule)

As far as 0% interest or even 1-2%, I'm all over that. It wouldn't make sense for me to cash out stuff to buy a car for free interest. As long as you don't keep getting yourself in debt. The whole idea is to live debt free. I use the 90 day same as cash or 1 year same as cash all the time. Except I will divide the total amount of the money I borrowed over that time and make the payment faithfully.

Again, we all dont' live in perfect world, and I do admit I wish I followed my advice closer than I DO.

 

[joatmon]

I've lived both ways being discussed here.

For the first 32 years of my life, I would spend money faster than I would make it. I had lots of things, but no money. Not fun.

The last 24 years have been much better. During this phase of my life, we saved for that first "starter" home. We put down 40%. 3 years later we purchased our current home. We put about 40% down again. This house has been free and clear for a number of years. I didn't follow all my friend and neighbors to the next subdivision up the latter. To me, a 3900 SF, 5 bedroom home is enough. I don't worry about money. I'm self employed and didn't worry when my current client asked my to take 4 weeks off at the end of the year. The $15k of medical bills we faced this year weren't a financial burden. It's nice to be able to get an MRI "just in case". We've got 2 young kids. We're going to Disney in less than 2 weeks. We'll pay for the tickets/lodging before we leave. Oh, this trip was spur of the moment. Nice to have the money.

So, I feel that living under your means affords you the luxury of doing what you need and to pursure a lifestyle you desire. This way is so much better.

Do remember that life is a series of unexpected events. Kids, car breakdowns, accidents, water heaters and furnaces breaking, spouse wanting new carpets, nice furniture to fill up that big house, aging parents that require money and attention, jobs that go poof, illnesses that threaten a career, burnout, bad bosses, change in corporate direction, etc.

Now, make up your own mind. This is simply what works for me and my family.

Take care,

Jack

 

[JHZR2]

quote:

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Originally posted by XS650:
The low rates of the past 4 years are just blips on the radar. Anyone who thinks our deficit spending isn't going to run the rates back up is welcome to buy a large orange suspension bridge just north of San Francisco that I own.

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Youre right, rates will go up for sure. However, at this point in my life, at my age, etc., EVERYTHING is going to hurt me... Rising interest rates are bad, home price appreciation is bad, renting is bad, inflation is bad, etc.

The only good is a mass of people forclosing on nice homes that I can buy cheaper...

It costs as much if not more to sit on the sidelines than to get in. But if a good downpayment on a reasonable home in my area is undoable (40-60k saved up short-term!) then Im stuck. If the lowest priced OK homes in areaqs with half-decent school districts are $200k+, whats someone to do? Rent forever until they have the downpayment? In the meantime prices have appreciated, and I end up paying more.

If Im young, understand the risks and have a viable exit strategy, with just in case worst-case mortgage scenario payments that I can afford now, then why not have the option to be able to pay a little less if I want to have an extra thousand dollars one month for something. Im only young and single once... I might as well enjoy it, but not at the cost of waiting on buying the right house. And if the right house is $250k, so be it... If I pay it at what would be the 30 year mortgage monthly payment I havent regressed in any way. And if I pay less, I can enjoy my last couple free years. If I pay more, Im doing even better!

Its absolutely correct to not put faith into unknowns... But if I was to buy a house with a 30-yr payment that I could comfortably afford now, but have the mortgage as an interest-only (with the option to pay more if I wanted to each month), then I could pay at the 30yr rate, I could pay less if say I was to get married and wanted an extra few bucks one month to go on a nice vacation or something, yet still keep flexible.

With a good exit strategy (say mandatory refinance at 7.5%) I wouldnt get too screwed over as far as rates went, and I dont see the downside. Especially if most months I paid it off VERY aggressively.

As I see it, the downside to doing an interest only mortgage is that in 3,5, or 7 years, Id HAVE to refinance, and since everyone knows rates are going to head higher, Id be stuck with a worse rate than if I had a traditional mortgage now.

If I dont use it to buy more house than I can afford, or to leverage the future prospects, than that is the only downside... While the upside is that Id have more discretionary spending money upfront while single and young, to use if I wanted to (my parents made me very frugal for the most part, so I live quite cheaply), and could make full or more than a 30 yr mortgage-sized payment if I desired as well, hopefully allowing me to have a smaller mortgage when i refinance, allowing me to take advantage of super-low short term rates now, and having a smaller mortgage later to keep my total interest payments over the life of all loans hopefully lower.

Of course everyone here has me sold on a conventional loan

. But as was said earlier, on a $50k salary, a $200k home should be able to be paid off in 5-10 years, so why not take advantage of doing that, while on a short-term, lower rate mortgage, and refinance a smaller amount at a higher rate later, and pay it off just as fast, or have the option of a bit more cash on an off month when it could be very useful?

Thanks again,

The devil's advocate

 

[darryld13]

Only problem with trying to flesh out here what you should do is that you are dealing with lots of hypotheticals surrounding personal risk, comfort and spending habits. We all define and value things differently. Your Saab purchase is a concrete example. You say that you saved $5K on a bargain deal by buying a $28K car at $23K. Others might suggest that you should sell it and apply the proceeds towards the new house downpayment, leaving any new car purchases alone until you've acquired your home.

Any advice you see here will be based on personal values and experiences that you probably do not completely share. You envision your job and surroundings as stable for 10 years while others among us may not be able to picture the same environment (neighborhood, family, job) for more than 4. Go with what you feel comfortable risking and makes you happiest - that really is all any of us can do and hope for. Good luck!

 

[Amkeer]

Dude you are getting excellent advice and you are not listening to what is being told to you. You asked for input and you are getting it yet you seems determined not to do what the majority that has experience are telling you to do.

Get a fixed rate loan at 15 or 20 years. Its that simple! Your theory is not sound and could flat out hurt you.

I have made a great deal of wealth by doing what was written above by others replying to your posts.

You can't do a 10,40,40, blah, blah legally. You can do investor type mortgages for flips, but that wouldn't fit your criteria since they are short term paper.

Stick with a regular note and worry about diversifying extra income into other assetts that will provide a return.

 

[Ugly3]

JHZR2 - Youre right, rates will go up for sure. However, at this point in my life, at my age, etc., EVERYTHING is going to hurt me... Rising interest rates are bad, home price appreciation is bad, renting is bad, inflation is bad, etc.

The only thing that will hurt you is your judgments. The world and it's events are unpredictable, we have to make judgments to adjust risk to benefit. It is those judgments that will kill you, take on more risk than you have to and you may come out ahead and you may really get hurt.

It is up to you. Probably 20 people who have lived through the history of interest rates and housing booms have given you their opinions on how much risk is tolerable.

Make your choice!

 

[JHZR2]

Thanks everyone for the input!

 

[eljefino]

Don't sell the Saab! I'd hate to think about what you'd get for it.

Ride out the loan. Consider your next car can be, hmm, a Chevy Cobalt with the "saab ecotec" (Just keep telling yourself that.) Since you're closer to work, you won't spend as much time in your car so you can drive a more ordinary econobox. This will make you maintain the Saab for 15 years.

New Jersey has tons of jobs in all different fields. No they aren't recession-proof but if you burn out in your current field you can start something new without relocating.

Real estate prices are simply based on what people are willing to pay. You're competing against bozos with interest-only loans and they're driving up the price. You wish the FDIC or some banking agency would ban interest-free loans and require EVERYONE to put 10% down with NO CHEATING, no under-the-table money from rich parents. In that perfect world home sizes and prices would come down. But it's not going to happen. What new get-a-house-for-nothing scheme will come out next? Who knows but they won't stop. It's a goal of every presidential candidate to put everyone in a home. This benefits CURRENT LANDOWNERS whose property appreciates... Grab that house! You should really have the house you live in PLUS some extra investment property, but one step at a time...

I'd make sure there was no penalty for prepayment so you can thrown in an extra $500/month and actually eventually pay the place off. Don't know if you can get a cap on that adjustable rate.

I was you 3 years ago this spring (april 02) but I bought a place and houses have gone up in price more than my salary since then. I had a fairly lousy mortgage with PMI and 5% down but I got equity (mostly from the whole region appreciating in value) in a year then refinanced, lost the PMI, and cut 9 years and more than 1% off.

The absolute worst case scenario is you pay the bank what you'd pay in rent; rates go dramatically up, you let them foreclose, and go back to renting. They aren't the mafia and won't come break your pinky finger.

So do it and hold on for the ride, is my vote.

 

[DKT]

I have a little different view of home ownership. I have had a interest only mortgage for the past 9 years and love it. It is actually a 25 year mortgage with the 1st 10 interest only and then a 15 year ARM.

A suggestion is to look at what index the mortgage is tied to. Ours is a one month adjustable tied to the LIBOR (London Inter Bank (can't remember what the OR stands for)). This rate is published in the Wall Street Journal. Anyway this index for the past 9 years has been very stable (but does move with Fed policy) and has been consistently below the other indexes. At one point our mortgage rate was below 2%, and I don't believe it has ever reached 8%. I also bought down the rate 1/2%.

My view is it depends on how aggressive you want to be with your investments (which I view home ownership as, an investment that you happen to live in). My view is that generally homes will appreciate (still need to be sensitive to school districts, etc), so it comes down to how much do you want to leverage your money. For example if you had a 10% down payment into your $300K home, and the house went up 10% over time, your return on this would be 100%. If you had paid off your home your return would be 10%. And you would have $270K tied up in an investment that you may be able to get a better return on.

So if you want to leverage the house, then get a low down payment, and sock the additional cash that you have available to pay down the principal and invest it. (stocks, bonds, mutual funds, T Bills), select whatever risk level you feel comfortable with at the time.

I have been following this approach during the '90's and made some money (also gave some back in the 2000!!).

Just my thoughts on home ownership.