Comments on: How an Interest-Only Mortgage Works

By: Hoodia Gordonii

Hoodia Gordonii — Sat, 09 Feb 2008 06:07:24 +0000

Nothing can stop me by posting these comments.

By: Hit counter

Hit counter — Sat, 26 Jan 2008 06:48:49 +0000

Mony is mony and all we need is mony

By: leeanne

leeanne — Wed, 15 Aug 2007 02:49:12 +0000

yes, there are people who are using I/Os to get into houses they can’t afford. but perhaps that says something about the out of control real estate market of the past 2 years that is only now beginning to slow down as shady practices by everyone from lenders to builders to buyers is being exposed. i write this from one of the highest cost of living areas in the country (DC Metro), where you can’t buy a house for under 400K, and the possibility of renting even a one bedroom apartment for under $1500 per month is slim (unless you don’t mind dodging stray bullets in your living room). Have incomes risen as fast? I don’t think I need to answer that. People feel forced to make a decision between an apartment they can’t afford or a property they can’t afford. Which would you choose? “Just pay that sucker off” is not an option for an increasing number of Americans.

By: Earle

Earle — Tue, 31 Jul 2007 18:22:42 +0000

Forgot to mention- my interest rate is 7.5%.

By: Earle

Earle — Tue, 31 Jul 2007 18:19:18 +0000

I have an IO payment of 1,600 on a rental property in an area not likely to appreciate very much. It brings in an extra 1,400 per month. I’ve been putting that extra 1,400 towards the principal.

Would I be better served putting this extra 1,400 in a mutual fund/cd/stocks of some sort, and if so, what return would I need on the investment to justify not paying down my principal?

Thanks to any who have an opinion/experience on this.

By: Michael Ivanov

Michael Ivanov — Thu, 05 Jul 2007 20:59:25 +0000

There are so many things that must be taken into consideration and depending on what they are(appreciation, depreciation, equity already vested in the property, financial situation, and others) an I/O can be an incredible money saving option or a tool for disaster. Just my 2 cents.

- Michael
http://www.gotoloanguru.com

By: AllFinancialMatters » Blog Archive » The Top 5 Reasons to Pay Off Your Mortgage?

Mon, 14 May 2007 15:30:55 +0000

[...] How an Interest-Only Mortgage Works [...]

By: elpidiovaldez

elpidiovaldez — Thu, 10 May 2007 03:39:54 +0000

ok, I see value on the interest only loan, as long as is fixed rate, and doesn’t have a prepayment penalty.

Say for example you want to buy a second house to move out of your current house, keep your current house and rent it out.

Ok, I would take a cash out loan on the first house just enough to put 20% down on the second house (plus a little emergency fund) and an interest only loan on the second house to have flexibility on the cash flow.

The first house (old) presumably will be paid by the renters, so the interest only payment allows for better cash flow. Rent doesn’t have to be too high to cover a full amortized loan.

On the second loan, I can accelerate the payments, as long as there is not better place where to put the money at the time.

Eventually when the 10 years interest only expires, there will be enough equity in the first house (barring something really drastic and never seen before) just because the appreciation.

At that time, there are decisions to make.

1. Sell the first house and invest the money.
2. Continue renting the house, granted that at the time rent is enough to cover the increase interest only payment.
3. Refi the first house, take out cash (to the level that rent covers costs) and use that cash to make a sizable payment on the loan for the second house, thus in fact having the ability to reduce the payment for the rest of the life of the loan.

My point is that interest-only payments are a good tool. The bad thing is when somebody buy a McMansion and can barely afford the IO payment. That is a recipe for disaster specially because people that buy McMansions that cannot afford also have the tendency to take “no cost” cash out refi to keep a life style that cannot afford.

In my opinion there are not good or bad loans, but there are smart and no so smart borrowers. That is where the problem lies.

By: adamH

adamH — Tue, 03 Apr 2007 17:43:02 +0000

wow, great discussion on this topic, too bad it took me a week to catch up on my RSS feeds. I get paid quarterly bonuses, so for me, an I-O mortgage makes a lot of sense: keep the monthly payment as low as possible (without digging myself into a deeper hole like some of those reverse-amortizing loans that helped kill the sub prime lenders) and pay down equity with my bonuses. To me, I view it as taking the equity part of a fixed rate mortgage as chunks of 3 months that i make payments for every quarter. But, to me, I-O loans make sense only if you know you have ‘hills’ in your salary (like I do) or your pay is variable (comisions, etc) and you have enough extra money lying around to get you through some sparse time. Obviously, I am only looking at this through a consumers point of view who is buying a place to live in themselves, and I think some of the other reasons listed above have validity to them.

By: db

db — Mon, 02 Apr 2007 23:17:53 +0000

@Andrew:

No, it doesn’t make db unhappy. However db won’t touch that concept with a 10-ft pole (except the part about not expecting a 401(k) or IRA to cover retirement). I’ll let others monkey around with the Missed Fortune stuff. As for me, I will at the very least have a 10-20% downpayment whenever I buy a home, and I will be paying it off in 15 years or less. Otherwise I’ll be a renter.

@miguel:

I relent and take back my flippant “debt is bad” comment. Yes, debt can be useful in certain circumstances. I’ll reframe it like this: Debt is dangerous, it’s to be approached with caution, and you should always keep in mind that neat mathematical rationalizations of how it should all work to your favor could easily turn out to have been mistaken.

I too benefitted from debt for school (monetarily it’s been decent; the happiness factor that results is another story — the payoff hasn’t extended to personal fulfillment). I do not have the money to participate in the real estate game, and credit cards are more a curse than a blessing.

That said, you’ll never convince me that paying on an interest only mortgage has significant enough benefit to warrant it, at least not for a primary residence. The rationale behind investment properties is outside my interest — do whatever you want there (though I do have a grudge at this particular sector for driving property values up to ridiculous levels).

I’ve said about as much on this topic as I have to say.