Interest Only Loans

[swanson719]

So I was talking to a guy at work about buying and selling houses from a military standpoint. The government pays us a housing allotment each month if we live off post. So he was saying it is smarter to take the allotment and buy a house with an interest only fixed rate loan, and then 2 or 3 years from now when you move again, sell the house, pocket the difference, and put it into a money market account. The theory is that if you keep doing this over the course of a 20 year career that you'll probably live in 8 or 9 different houses, and gain at least $20,000 per house, plus interest off the money market account. You use the interest only loan so you aren't paying the extra $150 a month towards principle when it's not going to make a difference if you move in a couple years. So theoretically, you'd be able to retire into a paid for house worth $160K to $180K minimum w.o the interest, and never having made a house payment out of your own pocket. He's been in for about 12 years, and has amassed in the neighborhood of $120,000 with interest over 5 moves, though he didn't make anything with this last one. That's still a pretty nice house in this area, though not so much in California. Is this something that actually makes sense in this situation, or is it over-leveraging? What's to say you don't take a big hit in a down market? To me, it sounds the same as flipping houses, but living in them for a few years before you resell.

[gamecock43]

I think you would have to be very educated and calculating to do this. Realtor fees come to mind, usually they take a few years of appreciation that your house has earned. Also you would have to be very educated about resale potential, and money management. I think it's a little risky buying a home you cannot afford because you are confident that your "plan" in the military will go the way you predict. Your putting yourself in a situation where you must "stay the course" and leave no room for possibly quitting, having unexpected circumstances, or life interventions.

[faithman1012005@yahoo.com]

I think this sounds like a great idea if you are very calculating. Have you looked into buying foreclosures? It may require a little more work but you can purchase one that is already valued at 20 or 30k more right from the start, let alone 2 years later.

[arthurb999]

That assumes house prices go up 20K per 2-3 years... lol... he would have been caught holding the cookie jar this year when they delinced ~30% nationwide and are not selling.

[Joan.of.the.Arch]

Are interest only loans even available still? Would you expect them to be available for the rest of your career and in all places you might live?

A relative bought a house in a town with a military base. Or shall I say, it used to have a base. It had closed eight months before she came along, leaving a lot of houses for sale at decreasing prices. Getting caught in the last months of a base's existence like that could throw a big wrench in your gears.

Is anyone expecting that we will return to the days of steep rate of increase on house values? I'm not.

[KevinCarr]

I am all for Interest Only loans. It provides flexibility for your finances. But, you do need to be careful. Most individuals in this country don't have the discipline needed to make that arrangement work. Good luck to you!

[KevinCarr]

Originally Posted by KevinCarr

I am all for Interest Only loans. It provides flexibility for your finances. But, you do need to be careful. Most individuals in this country don't have the discipline needed to make that arrangement work. Good luck to you!

PS: you need to have a strong work ethic and self control when budgeting. You can get ahead very quickly if you do. Otherwise you can have a hard time.

[swanson719]

I can only be stationed at bases with prisons - like Leavenworth, Knox, Sill, Lewis, and Hawaii. These are all major installations, and the only one that could conceivably close in the next 20 years is Ft. Sill, and that's a longshot in itself. I'm not looking at moving anytime soon, and yes, I would be buying an REO home to start. HUD houses are pretty easy to come by these days, and I still expect housing to at least match the stock market, as it historically has. Some years are better than others, but overall you average an 11% increase per year regardless. That's a lot better than inflation. I don't know if I'll try to do this plan when we move or not, but I just wanted to get a feeling for it. Seems to be mixed with a side of be very careful.

[noppenbd]

Originally Posted by swanson719

...and I still expect housing to at least match the stock market, as it historically has. Some years are better than others, but overall you average an 11% increase per year regardless. That's a lot better than inflation.

Where are you getting 11% a year average for housing appreciation? Long term, the numbers I hear are between 3-6%, so keeping up with inflation plus maybe a percentage point or two tops. Nowhere near 11% a year average.

From Robert Shiller's Irrational Exuberance:
...inflation-adjusted U.S. home prices increased 0.4% per year from 1890–2004 and 0.7% per year from 1940–2004.

So you are talking 3.5-4.5% a year nominally.

[creditcardfree]

Interesting thread. We just moved for the military for the first time and did buy a house...regular 30 year mortgage. Seeing that we will most likely move in 2 years having been here 5, I really do wonder if we will profit anything on this house. Right now, we'd be VERY lucky to make enough to cover the realtor fees.

We're full time Army Reserves, so we don't tend to be near major installations. A closing wouldn't affect housing, because there are a minimal number of full time staff.

It seems there would still be a lot riding on the appreciation of the house and minimal realtor fees. Honestly, I'm starting to lean toward renting. I think I'd save on maintenence and upkeep at least!

[boosami]

This sounds like a great way to purchase a home, be forced to relocate because of your job, and be stuck paying for an empty home that you're unable to sell because you're way upside down on the mortgage. Short-term house flipping only works when home values are tremendously appreciating, not the opposite.

[swanson719]

For the 11%, I was going with Dave Ramsey's book that states real estate keeps up with the stock market, which averages around 10-12% per year in growth. Obviously, not every year, but average.

[kork13]

You may just be more risk-accepting than I, but there's no way that I would consider this. I'm just starting out in the military, and know that in my career field, I'll be deploying frequently and moving often. In spite of that, if/when I decide to buy a house, I'm going to buy it and plan to keep it. If the situation/opportunity comes up to sell it at a profit when I move, great. If not, so be it, and I'll keep it as a rental/home-base for myself.

Besides, the interest-only loans seem like a bad idea to me. Sure, if you plan to flip it shortly (I'm thinking real estate investors who buy, fix up, and resell) they could be okay, but otherwise, it seems like they would be a raw deal, only costing you more in the end.

[swanson719]

Like I said, I'm in the boat where I only have 5 duty stations world-wide for me that I can be stationed at, and one of those is Gitmo. So moving a lot really isn't the case for me. Passed that, renting something way under what BAH pays is something I like the idea of too. We currently have a mortgage, but if I get moved in a few years I'm definitely renting there and selling our house. I don't like the idea of renting a house to someone and then coming back to live in it again - the idea of someone else living in my house and not taking as good of care of it as I would isn't appealing to me.

[creditcardfree]

Originally Posted by swanson719

I don't like the idea of renting a house to someone and then coming back to live in it again - the idea of someone else living in my house and not taking as good of care of it as I would isn't appealing to me.

I here you there. We don't have a choice of post housing. Our BAH covers our mortgage with about $200 left over. Which, of course, we use for other things.

The 11% average only works over a very long period of time. I'm almost positive Dave Ramsey does not recommend an interest only loan. I don't know if he even recommends buying a home for military.

[disneysteve]

Originally Posted by swanson719

For the 11%, I was going with Dave Ramsey's book that states real estate keeps up with the stock market, which averages around 10-12% per year in growth. Obviously, not every year, but average.

Does DR actually say that? I disagree with a number of things he says, but this one is a real doozy. No way do home prices appreciate at an average annual rate of 11%. The actual rate isn't anywhere near that.

As for the topic at hand:
1. I would never buy a home knowing I'd only be in it for 2-3 years. That's why they invented rentals.
2. I would never buy with an interest-only loan no matter what the circumstances were.
3. I would never plan or assume I could sell a home for a profit after just 2-3 years. Even if the home does appreciate at an average rate of 4-5%, the costs involved in buying and selling would eat up much of that.

[creditcardfree]

Originally Posted by disneysteve

Does DR actually say that? I disagree with a number of things he says, but this one is a real doozy. No way do home prices appreciate at an average annual rate of 11%. The actual rate isn't anywhere near that.

Honestly, I've never heard him say that, but I don't listen everyday or even once a month.

I agree with you on the 2-3 years...to short to make buying a home worth it. We will end up being in ours 5 by the time we move, I'm not sure that will be long enough. We'll still leave with equity, since we had a large down payment and have our HEL paid off, but any profit? I'm not so sure.

The next move...a rental may just be our thing. I'll be sad having white walls.

[disneysteve]

Originally Posted by creditcardfree

The next move...a rental may just be our thing. I'll be sad having white walls.

Surely you can find a rental that doesn't have all white walls. Especially if you are renting a house, I would think you'd be able to find some with some character to them.

[Like2Plan]

I'm sure interest only loans have some application (maybe a bridge loan on a construction project? ) , but I would not use an interest only loan in this case.

Whenever I have an investment idea, I think of it in terms of risk and what can be done to mitigate the risk. What are the risks in this instance?
The only scenario in which you would not take a loss is if the housing market went up and you were able to sell your house in a timely manner and at a profit sufficient to cover your costs.

1. What if you could not sell in a timely manner? How much would a few extra months cost you and could you cover it without a huge impact to your financial picture--let alone having the profit evaporate.
2. What if values went down instead of up or even just stayed level for a while? A new generation has just been educated that home values don't always go up. If you end up underwater on this investment, this could have also have a significant life changing impact on your financial picture.
3. What if your property needed a lot of repairs? The cost of owning a house can add up.

What could you do to mitigate the risks? You could have a huge pile of money to cover any losses. But, you could take that same pile of money and put it in an interest bearing account and earn a profit without taking on any risk.

[wincrasher]

Interest only is a thing of the past.

This strategy is full of risk - overly risky for the return on investment.

With only 2 to 3 years between sales, you'll be lucky to cover your real estate sales and closing costs. Even a 20 grand appreciation won't cover these things.

Plus you are risking your job performance and value. How good are you going to be at work if you are stuck with a house you can't sell? What if you can't pick up and move the family because you can't afford to carry your old house and get a new one?

You are much better off investing your money in the market.