Advice!!!! Buying a house interest only

[berger034]

I live in southern california where the mean house is something like 550000 or something outrageous like that. i want to buy a house for me and my wife but its on the out skirts of san diego( 45 minutes away in a place we call temecula or southern riverside). the houses are a little cheaper, you get a little land and you may actually afford something. to afford something like this i was thinking of an interest only loan.

What tips or pointer would you guys reconmend.

[Cearbhaill]

There is a lot to consider- how long do you expect to be in the house? How is the neighborhood- is it coming or going? How old are you? Do you really expect your income to improve that dramatically in the next few years? Will you be investing the savings?

I am by no means any sort of expert, but sooner or later you will have to start paying on that principle.
Are you considering this as part of some overall financial strategy, or just because you can't afford a mortgage payment?
If you simply can't afford a mortgage payment can you afford to maintain a home?

Squeaking your way into a house then letting things like necessary repairs slide only to have bigger payments coming due in 5 years doesn't seem like much fun.
Finding an objective advisor would be a good idea for an investment this size.

[BrianD]

Toni, great advice!

[Jamesurq]

Definitely. You should only buy a house you can afford with a conventional mortgage. Getting the interest only loan to bank the savings, or to get some other debts paid off (ie: car loans, credit cards) is a good plan. Getting interest only to get a bigger house than you can afford is a recipe for disaster.

[tonkadawg]

I bought my first house with a 3/1 arm and line of credit for the second. The payment for the first had some principal in it, but I opted to make only interest payments for the second. It was all I could afford. But, due to the market where I bought and dropping interest rates, I was able to refinance two years later into a conventional mortgage while keeping the payment pretty close to the interest only payments.

just something to consider...

[llpoolej]

Interest only loans are very popular right now, especially in CA.

I would do one ONLY if I thought the value of the home was going to keep going up (Like CA) and gaining equity. Instances are new construction(that I had built) that are going to appreciate considerably. Then my home will have gained equity through rising property values vs paying down the loan. You would still be left in a good position

Countrywide has a great product called "Pay by Option" and it gives you an option to choose every month to pay interest only, a small portion of the interest, a regular 15 or a regular 30. The rate is outstanding too. I have used that for some of my upper income clients who do not want to be married to a payment.

With a straight up interest only, you can *always* pay toward principle. It isn't like you are lowering your balance much in the first 5 years anyhow!(on a 30 fixed)

[Wilafur]

i am seriously considering a 30yr fixed interest only 1st note and a heloc for my 2nd note.

btw, the 1st note is interest only for the first ten years and then switches to P&I for the remaining 20yrs.

i figure this way, i can apply the prinicpal i would have paid toward the 1st note to the 2nd and pay it off in a few years (@4-5yrs). then once the 2nd is paid off, i'll plow as much money as i want towards the principal of the 1st note.

since the townhome is very close to UCLA, i will be holding onto the property as my 1st rental after i upgrade to a larger home (whenever that time may be).

then again, if i am able to lock in at 5.40% or lower for my 1st, i'll just do a conventional loan.

[Crusty Old Shellback]

I looked at the interest only loans last year when we bought our house. Down side was that I could NOT pay any of the principal during the first 5 years, only the interest, which means at the end of 5 years, I still owed what I borrowed in the begining. I also talked to my relator, who is a family friend and he too said not to do it. What we wound up with was a 1st for 80 % and a 2nd for the other 20% and that got us in without paying any PMI, however, our 2nd was at a higher interest rate. We did go ahead and refied after being in the house for less than a year and went with a ARM. Since the house had appriceated enough, we got a single loan and did not have to pay any PMI AND our payment dropped by half.

[Jamesurq]

Originally posted by blown63chevy
I could NOT pay any of the principal during the first 5 years, only the interest

meaning you were not "allowed" to? or just not able to?

The idea is to invest the money you would have paid to the principal in something with a good growth potential... Like.... um.... algae?

[Niven]

Interest only is excellent for investment property. It's all about cash flow anyways!

[berger034]

Hey guys thanks for the advice, its great.

you guys wanted some specifics on my situation.
im 30 yrs. old but really my friends and wife think that i am 12. my credit reflects the 12 year old, i have none really.

i work for verizon wireless and am currently on track for a managerial positions where managers at verizon make great money (sales at verizon make better money but being a manager suits me better).

the area i am looking into has appreciated and will still appreciate. its growing like mad and it is a new home i will be purchasing. the area's starting price is around the low 400's
that is quite a payment.
tahnks again, you guys are great

[Wilafur]

if you have iffy credit, you are going to get hurt big time when it comes to rates. remember, if your wife has a high fico score and you don't, they will always go with the lower of the 2. it may make sense for your wife (if she income qualifies) to get the mortgage on her own.

[pubily]

California is amazing and scarey! I grew up in Ojai, Ventura, Santa Barbara areas but when I visit now I feel like I'm a tourist in another country. I was recently there and checked housing prices which are simply impossibly high. I admire people that live in Ca. but I can't imagine how someone could buy his first home with prices as they are and wages about the same as the rest of the U.S. With so much money going to mortgage payments each month how can you enjoy yourself or be able to do discretionary spending?

[Jus Reefin]

I'm a Mortgage Underwriter ( I approve your loans). The advise offered here is Great!!!!

[Wilafur]

whats discretionary spending?

[bkwudzjeep]

With interest only, would making double payments make a difference?

I have heard that it you make double payments once a year with a regular mortgage, you cut the length of making payments in half......or something like that.

[llpoolej]

Even just adding $100 to your payment every month makes a difference. If you double your payments on a regular mortgage it cuts the time alot faster than in half.

Remember, you have your taxes, insurance and possibly mortgage insurance in that payment.

Heck, making an extra payment a year will shorten the duration of the loan alot!

[Wilafur]

lets say your note is $333,700 @ 5.5% fixed for 30yrs.

by making an extra $100/mo payment:

you save $47,000 in interest and pay off the mortgage 41 months faster.

just food for thought.

[bkwudzjeep]

So it would have the same effect with an interest only mortgage?

[Jamesurq]

Guys - don't you get it??? The idea of an interest only mortgage is that the savings can be invested at a higher rate than house appreciation.

Making a $100 a month payment to pay off a debt your paying 5.5% interest on versus investing in a group of mutual funds with a conservative 8-10% growth rate. Seriously, take the extra 100 and have it automatically taken out of your check and stick it in a mutual fund.

When you go to sell your house, you can use it if you need it.

I guarantee you'll do better with this approach.