Interest Only Mortgage Question

[genchan]

I'm thinking about buying a home and have a question about the " Interest Only Mortgage" loans that are currently being offered. They sound like a great idea due to the low payments, but I'm wondering what the disadvantages might be. Any feedback would be appreciated please!

[terry1156]

The Interest Only Loans aren't really "interest only" -- you just pay the interest (and not the principle) of the loan for the first few years. This make the payments a lot smaller at the beginning, but then you have to pay off the principle of the loan over a shorter perioed of time (ie 25 years instead of 30 years if the interest only portion of the loan was for 5 years)

What that means is that your monthly payment will dramatically jump once you hit that date.

Most people like these loans because they can buy more house than they could with a conventional loan. My opinion is that too many people buy too much more of a home than they need these days and that, along with credit cards) is what gets them into trouble. I think you should think long and hard before choosing that over a conventional loan.

[cmorus]

Oh, boy, I agree with Terry. If you can't afford the monthly payment (interest, principal, property taxes, utilities and repairs), you need to find a more affordable home. Being house poor is about the worst thing you can imagine! And don't forget to set aside money for furnishings and repairs.

4 years ago, I bought an 8 year old house in "move-in" condition. Since then, I have replaced the kitchen countertops and kitchen lighting, replaced every overhead fixture in the house -- most with ceiling fans, painted the entire downstairs and my room, repainted the outside of the house, put in air conditioning, removed lots of junipers and planted new landscaping, thatched and aerated the lawn twice, replaced all 3 toilet seats, moved the washer and dryer out of the 1/2 bath to the garage and put a closet in its place, replaced the vanity in the small bath. Next, I'll be replacing all the downstairs flooring and more re-painting!

And, of course, there was window washing, carpet cleaning, garage door maintenance, furnace and water heater maintenance, etc.!

I tell people they need to put aside 3-5% of the value of their house every year for repairs and maintenance, replacements and furnishings. So, if you have a $200, 000 house, you need to set aside at least $6,000 per year and that's $500 per month on top of principal, interest and property taxes!

I recommend you "practice" making the anticipated house payment for 6 months and see if you can still live within your means. Put the extra money aside in a special ING account and you'll have a cushion when you get into the new house. Plus you can sleep nights knowing you can really afford your house!

Cindy Morus
cmorus@phelps-creek.com

[jeffrey]

I must agree with Cindy and Terry here...there are times when the interest only mortgage can be an advantage, but you really need to know exactly why you want it over a traditional mortgage -- not just because it happens to be a less expensive payment at the beginning.

Cindy also makes a valid point on purchasing houses. With interest rates so low, people often think "my payment will be less than rent for an apartment" if they purchase forgetting that house upkeep is quite expensive along with extra taxes. That is not to say buying a house is a bad idea...just that you should not compare the mortgage payment and rent payment directly...be sure to factor in those other expenses that come with owning a house.

[jhd815]

I couldn't agree more about the "interest only" offers out there. It seems to me that these popped up once the interest rates began to climb.

One of the largest disadvantages that I see is that by paying only interest you build no equity in the property.

I see way too many people mortgaging more house than they can truly afford and so many houses in my development (only 4 yrs old) are in foreclosure.

Owning a home is a wonderful investment ... but where's the investment if you're only paying off the interest?