Interest only Mortgages

[JHZR2]

quote:

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Originally posted by eljefino:
Don't sell the Saab! I'd hate to think about what you'd get for it.

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No Way!

I plan to hold the car long-term. I didnt buy with resale in mind, but rather fuel economy, safety (apparently got the industry's first 'double best' safety award) and practicality. And Im really happy with the car. Im not going to go to an SUV, wont need a minivan for a LONG time, so Im going to get LOTS of use out of it. I see no way of getting economy out of a vehicle any other way. Since my pay-off was well structured, and very quick, the loan doesnt bother me or put any sort of a significant dent whatsoever into my finances... The car loan will be a thing of the past soon enough anyway...

I love the car, I love all my cars! I would have kept driving my 83 MB turbodiesel with 228k, as it was like brand new, but an uninsured driver smashed it and I got screwed over

Thanks!

 

[Amkeer]

quote:

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Originally posted by 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.

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You can't get a return on a down payment! Your math is flawed. If you put 10 percent down on a 300,000 home you still have closing costs that you will be required to pay. Even if you think you will get 10 percent appreciation you still have paid INTERST ONLY at the rate of what..$1500 off the top of my head. $1500 at 12 months is equal to $18000 in INTEREST ONLY. You still need to add property taxes, insurance, repairs....If you do the math on a 15-20 year loan you will see the difference between it and an interest only loan.

 

[brianl703]

You know, a lot of people have interest-only loans on lots of things.

It's called only paying the minimum charge on the credit card each month.

 

[DKT]

Amkeer, I respectfully disagree.

1) Most of your points have to do with making the buy verses rent decision. Closing costs are costs that you are going to incur if you buy, regardless of what type of mortgage you get.
2) Taxes are again related to the buy/rent decision, not the mortgage type.
3) Interest only will be a smaller payment, and the decision should be whether I want to pay the additional amount of the mortgage to reduce the principal (pay off the house) or use that money in other ways, such as investing.

I've done the math many times, and insurance and repairs don't factor into a mortgage decision, unless you put too small of a downpayment and have to buy PMI, which is escrowed in the mortgage payment.

You do get a return on the downpayment - it's the appreciation of the house.

 

[JHZR2]

quote:

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Originally posted by DKT:
1) Most of your points have to do with making the buy verses rent decision. Closing costs are costs that you are going to incur if you buy, regardless of what type of mortgage you get.
2) Taxes are again related to the buy/rent decision, not the mortgage type.
3) Interest only will be a smaller payment, and the decision should be whether I want to pay the additional amount of the mortgage to reduce the principal (pay off the house) or use that money in other ways, such as investing.

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OK, some questions/points to add:

1)I wish to avoid closing twice, as thats just money out the window. Make sense? Thus why not start with something that isnt huge, but isnt a 'starter' either that down the road Ill have to sell, give away 6% of my proceeds, and taxes, and close on another property... Thats my thinking, and if I can get a seller's concession to pay my closing costs, then Ill be doing well!

2)Property taxes are write-offable on income taxes, right? NJ has high property taxes, but in return we have excellent services, schools, etc. So since down the line I may be reaping some of the money I paid in for kids to attend school, its an investment of sortts too. But if it is possible to write the tax off, which I had the impression it was, its not such a bad thing. At least Im not throwing away cash by renting and not getting anything from it ever.

3) How much do you split your excess money between the amount you have above the interest-only payment and your investments? I would put all my available money into the mortgage, I would simply use this vehicle to have the ability to free up a few thousand if I need them some time, without feeling pressure in any way.

That said, if I could get a 5.25% mortgage, on, say $250k, which is an average home in the area that Im looking (closer Phila suburbs, NJ side), chances are that over 15 years the savings would be more just making the regular payment, than having a 3-4% mortgage for the next 5 or 7 years, paying aggressively, then having an 8% mortgage for the next 10 or so.

At the same time, lots of people made it just fine in the 80s when double digit interest was the norm, and paid off homes quickly. Maybe the salary to home price multiplier was lower back then, but I cant imagine in the big scheme of things that its all that different.

Id be interested to hear some rough estimates/calculations that you mentioned that you did a number of times. As I said I wouldnt be investing, but equity in a home while retaining monthly flexibility would be a nice thing.

Thanks!

 

[DKT]

I may have mislead you. My mortgage is a single mortgage but it is 10 years interest only and 15 years traditional. I only had one set of closing costs.

There are several theories about buying a house. One is that you buy the least expensive house in a neighborhood, as when the neighborhood appreciates, the lower houses tend to appreciate more to normalize the neighborhood. I have no idea if this is true or not. My personal experience is to shop for an area that is growing and that has excellent schools and a reasonable commute. This will keep the area desireable and thus appreciate. A good realtor will be able to demonstrate to you the stability of the housing in the area.

You can write off property taxes. The only thing you need to keep in mind is that if you get too small of a house, the interest and taxes may not reach the Standard Deduction then you get no benefit out of the deductions. I think for single in 2004, it's $4,850, married, $9700.

I don't keep track of how I split my excess cash. I just had no money in the house other than the closing costs (I have a 80% interest only mortgage and a 20% home equity loan).

What I was referring to on the calculations is just figuring what a 30 year mortgage is, Vs a interest only. For example a 30 year mortgage @ 5.25%, $240K, is $1,325.29 per month. Interest only is $1,050 per month. Another minor thing to consider is that if you are good at managing your money, then avoid escrowing if at all possible. The mortgage companies have you pay into this for 12 months, but often pay the bills at the end of the year, so they are drawing interest on your money waiting to pay the bills. Interest that you could be earning.

 

[Amkeer]

quote:

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Originally posted by DKT:
Amkeer, I respectfully disagree.

1) Most of your points have to do with making the buy verses rent decision. Closing costs are costs that you are going to incur if you buy, regardless of what type of mortgage you get.
2) Taxes are again related to the buy/rent decision, not the mortgage type.
3) Interest only will be a smaller payment, and the decision should be whether I want to pay the additional amount of the mortgage to reduce the principal (pay off the house) or use that money in other ways, such as investing.

I've done the math many times, and insurance and repairs don't factor into a mortgage decision, unless you put too small of a downpayment and have to buy PMI, which is escrowed in the mortgage payment.

You do get a return on the downpayment - it's the appreciation of the house.

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DKT,

Since when did I compare to renting?

Your adding more wrong info! Unless you contribute more than 20% of the appraised value you will be required to pay mip,pmi. You pay property taxes yearly as well as insurance and it is a factor in obtaining a mortgage.

You are basing everthing in your analogy as pure speculation. A interest only loan pays no principle! You are better to take THE EXTRA CASH and start with a 15 or 20 year note. I have seen people financial ruined buying tops of real estate markets. Interest only loans and top of market is pure suicide.

 

[DKT]

Amkeer,
I'm discussing mortgage types, not the housing market in the Philly area ("top of the market").

What wrong info am I adding? I mentioned PMI "insurance and repairs don't factor into a mortgage decision, unless you put too small of a downpayment and have to buy PMI, which is escrowed in the mortgage payment."

I have had an interest only mortgage for 9 years and it is exactly what I wanted and has saved me money, and I have made money by putting it into the stock market, rather than repaying the principal of our home loans. I don't believe discussing my experience is speculation. ZHZR2 is already doing some of what I'm suggesting. He has chosen to save 14% of his income for retirement. He could just as easily decided to get a bigger house and use this retirement money to pay off the mortgage faster, but instead decided to save this for his retirement.

IMO, what is sucide is buying the wrong house, regardless of the mortgage type.

 

[Amkeer]

Forget it I am done trying to explain...