Are interest only loans a GOOD or BAD idea?

[Anonymous]

There are many considerations when evaluating interest only and/or Option Arm.   Are you considering a fixed rate interest only or a variable (variable loans are based on different indices and you need to understand how that impacts your loan).   Generally, if you are in a market where values are increasing, and if you own personal financial situation is stable, they can be wonderful.   An important thing to do when you have an interest only or Option Arm is to save as much of the difference between a regular payment and your interest only payment ... invest that difference in solid investments (see a good financial advisor/planner) ....Also read the book, "Missed Fortune" and/or Ric Edelman's book to better understand these concepts.

[Anonymous]

topaz:

Thanks. I'll look for this book.

I hate to think of refinancing again in a few years but refinancing now seems like it's the only way to get our payment down right now and ensure we can make payments on time for two years and then refi for even a lower payment then, since our score will bebetter at that point.

Can we actually make a big dent in the FICO score in two years? What do you think??

Thanks

Lee

[Anonymous]

Lee,

With your credit you will be looking in the mid to high 7% for interest rate unless you decide to buy down the rate. I do not recommend buying down the rate on a 2 year loan because you probably won't break even. (The money you pay to get a lower rate is more than the money you will save with the lower payment over 2 years).

Regarding the risk of an Interest Only loan and real estate. True, in many areas real estate is suffering at this time. We are seeing a market that is correcting itself after a couple of years of great appreciation. That being said, real estate over the past 10 years nationwide has seen an average rate of appreciation at 7%. Real Estate over the long term is generally a good investment.

I don't think however your focus is long term. Your primary concerns appears to be to get through the next couple of years. That being the case, other than the Neg Am loan (which I do not recommend), the Interest Only is your best option. If you are worried about payinf down principal, add some extra money to your payment when you can. The extra amount will all go towards principal reduction. However, you still have the cushion of the lower payment if you are short money one month.

[Anonymous]

A refinance will definitely save you some money. Is your loan amount at $290,000 because you are also pulling some cash out, you have a prepay penalty on your current mortgage, or you are assuming that much for closing costs.

If it is for closing costs, that is too much!

This is a huge financial decision, so it is important that you get what you need. (Granted, don't expect a 5% interest rate) You are being wise by doing your due diligance now.

[Anonymous]

Boheme:

Yes, we are adding to that loan amount due to closing costs, pre-pay penalty, and some cash out. We figured the pre-pay we pay now is no different, or maybe even better, than the loan we have at 14%...so we'll take the hit for the pre-pay as we're paying too much out for that 14% loan anyway.

Are most interest only loans set up for 2, 3 or 5 years and then they go to adjustables?

Sounds like most feel an interest only is better than an ARM. Is that about right?

I loev all this information! You guys all must have been doing this for awhile or do this for a living! You're all very smart!!!

Thanks...

Lee

[antredd67]

Current stats...

Low FICO (580 600 565)

1st mortgage 3 year ARM @ 7.5% comes up in September 2007...owe $165,000

2nd mortgage with American General @ 14% (line of credit) ...owe $102,000.

Income is $5400 month gross.  (husband)

I am an at home mom

No other loans or credit cards.

No car payment

All other bills have been paid off

We live in the home we want to refinance....been here for 17 years.

We'd then need about $290,000 on a new refi

Our home right now is worth about $500,000.

With a middle score of 580 and the banks tightening up on lending to people who have scores less than 620, I would try and do everything that I possibly could to get my scores above 620 by September. The line of credit, which if i am not mistaken, could be hurting your fico scores since it's typically a revolving line that you can tap back into after paying it down. Do you know how much you can borrow on your line of credit?  At 290,000 you would have a LTV of 58% which is not that bad for a refi loan.  AS far as rates with  your scores, I don't think you would get anything lower than what you are currently paying.

[Anonymous]

Lee,

There are Interest Only loans for 2, 3, 5, 7, 10 and even 30 years. In your case however, your credit is going to limit you to a 2 or 3 year Interest Only period.

An ARM is an Adjustable Rate Mortgage. Most Interest Only loans are Adjustable rate mortgages.

How they work:

[Anonymous]

Lee,

There are Interest Only loans for 2, 3, 5, 7, 10 and even 30 years. In your case however, your credit is going to limit you to a 2 or 3 year Interest Only period.

An ARM is an Adjustable Rate Mortgage. Most Interest Only loans are Adjustable rate mortgages.

How they work:

A 3/1 ARM - You have a fixed payment for the first 3 years. After 3 years, the payment converts to its adjustable phase which is generally a higher payment. Every payment from your first to your last includes principal and interest.

A 3 IO - You have a fixed Interest Only payment for the first 3 years. After 3 years the payment also converts to an adjustable and the payments include principal and interest from that point on.

[Anonymous]

Three things have been missed in all these discussions.

Location, location, location.

If you're in a market that's growing, with no sign of stopping or slowing, then getting in on an interest only makes a lotta sense.

However, if you're in a market that's bubble bursting, or appears ready to bubble burst, then it makes sense to sit tight, wait, and continue paying down debt.

[Anonymous]

Noah_Bodie

Good point! I think we'll be okay in that respect. Our area has been booming and although it has slowed somewhat, just like everyone else, it looks to continue the growth. We are in the valley and with the bay area (San Francisco etc) home prices so high it is pushing/forcing people out here to look for homes.

Thanks!

Lee