Interest Only Loans

[disneysteve]

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]

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]

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.