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ceng | Should I get an interest only 30 year fix mortgage? |
I'm considering an interest only 30 year fix mortgage but I'm still a bit confused.
After the 10 years, will the interest rate be changed to the rate at that time, or will it still be the same as when the loan first started?
If I made a large lump sum payment at the end of the 10th year, that will reduce my principle right? But will it also lower my monthly payment?
Does it make sense to save the money that you saved (about $200 a month) and invest it (at 3-4%), and after the 10th year, use that money as a big payment towards the principal. Thereby having a low payment for the first 10 years, and for the remaining 11-30 years, a payment that is not much higher than a regular 30 year fix mortgage?
Can someone answer my first 2 questions and also tell me if my reasoning can / cannot work? |
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golferwhoworks
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it could work if you were making more interest than the bank is charging, but your rate does not change at all. The loan is now RECAST to a 20 year note.
Example 100k note at 6% x30 years =599..55 reular payment
500.00 Interest only
recast 100k note at 6% X 20 years = 716.43 monthly
in order for this to break even then you would have to pay 16,134.21 toward the principal the month before you recast
also what happens if life happns and you decide to use the cash elsewhere
Think long and hard about this as you are not even getting the current rates that are out there on your savings |
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mlb
 |
This is the problem with the housing crisis going on right now. Never take out an interest only loan you will loose the house. The payments could triple in a few years and could you afford these payments? Unfortunately I have an ARM loan for my mortgage which the interest will change after 5 yrs. (2010). I am so afraid of loosing my house because of this. I pay an extra 90.00 a month hoping that this will bring up the equity so I will qualify for a fixed rate home loan. |
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Expert Realtor
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Honey, if you want to lose the house to foreclosure, get an interest only mortgage.
I'm not kidding.
If you can't afford a fixed rate in this market, you cannot afford the house.
You are setting yourself up for failure. |
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PoohBearPenguin
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What exactly are the terms of the loan, because interest only mortgages usually have variable rates, AND an increasing payment schedule to force you to start paying back the principle at shorter and shorter periods. Meanwhile, a 30 year fixed rate mortgage implies that your payment - like your interest rate - is fixed for all 30 years of the loan. The way this works is that you're paying the interest and a portion of the principle. As time goes on, the principle will shrink, meaning the interest will shrink, so that more of your payment goes to the principle. Your first payment, for instance, is something like 99% interest and 1% principle, but your last payment is 1% interest and 99% principle.
So saying "interest only 30 year fixed mortgage" would imply that the bank will let you make the interest payment on your principle for 30 years, but at the end of the loan, you still don't own your house. This makes no sense to me, and sounds like a bad deal all around.
Furthermore, unless you're some sort of wizard on the stock market, there's no way you're going to make more money by investing your principle payment vs. just throwing that money at the mortgage. Remember, as you pay down the principle, the monthly interest payment will also shrink.
Seriously, from what I can imply about the terms of your loan, I'd just walk away. It's clear you don't understand what's going on, and you're probably setting yourself up for a massive disaster that will result in you losing the house. |
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blondie
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interest only loans are nothing but trouble...stay away from them! |
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Big daddy
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interest only is an option and not the root of all evil, but if your planning on staying in the home for more than 10 years, why go interest only. Why not structure the loan for 15, 20 or 25 years, put the 200 saved from interest only back into the home so your paying principle and have the home paid off by the time you retire. sell the home and consolidate and buy that home with cash. You do not want to play chicken with a rate increase 10 years from now, look what's happening, it could happen again, it could not. Even if you pay a higher rate with a 15 or 20 term, you get to write that off your federal taxes, thus increasing your check from uncle sam every april. Look at all your options, have a til run for 15, 20 year terms, look at the amount financed and see the difference between the 30, 20 and 15, then make a decision, I think you'll be pleasently suprised, good luck and ask any questions you may have |
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Mark C
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Interest only = disaster. Use that $200 a month that you would "invest" and pay down the principle of a conventional mortgage.
You will never own your house if you don't. If you are paying the bank 6% and investing at 4% you are always behind. Buy a house you can afford with a fixed rate conventional mortgage and sleep at night.
Good Luck |
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FRANK
 |
The interest only mortgage can be a good plan. For example if you plan to sell the home in 10 years, or less, the money that was going to be used for principal can be put into a retirement account.
The gamble you take is that the home would sell at a price where you can at least pay off your mortgage 10 years from now. |
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csulbrover
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This is a complicated question but I will try to simplify this for you.
The answer from expert realtor is incorrect (a realtor not a mortgage professional) and you are not setting yourself up for foreclosure with an interest only loan as long as you understand the loan.
The interest rate is fixed for 30 years and will never change.
After 10 years the new payment will be calculated based on a principal and interest payment for the next 20 years. You can determine this payment by taking the loan amount and plugging that into a mortgage calculator based on a 20 year term. That will be the new payment after 10 years, but the interest rate will not change.
A lump sum payment will reduce your monthly payment.
If you send in principal, your payment the next month will be reduced. The interest only payment is always based on the current principal balance.
With an interest only loan you can add as much principal as you would like each month. If you are tight on money one month you can send in the interest only payment. If you have some extra money one month you can send in as much principal as you would like.
It does not make sense to save the money and invest it at 3-4%. You would probably be paying 6-7% interest on your mortgage, if you have an investment that pays you 10% that might make sense. You want to have a higher return on your money than the rate you are paying for your mortgage. This however may be a bit risky depending on the investment.
This questions is a bit complicated and you can get some more answers with a company called www.freehomerefi.com
I highly recommend them because they work with lenders that charge you no fees and no points. They also work to find the best lender for your situation.
I hope this helps give you some direction and I wish you luck with your home purchase. |
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