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Are 'interest only' loans just like renting???

interest only loans

Renting your home with an interest only loan. Doesn't sound as enticing, does it. Are 'interest only' loans just like renting your apartment?

An interest only loan is a type of mortgage program that allows your to pay a lower mortgage payment to where the interest is paid up front and the principal is paid back at the end of the loan or term. Many interest only loans tell you that you have to start paying back the principal by the 10th year.

Interest only loans scare me. If you really think about it and break it down, when buying a home, it's an investment. Sure, your investment will grow with equity down the road. And let's not use today's market to make interest only loans look even worse. Let's pretend business is as usual from previous years.

The majority of the people wanted interest only loans because they needed a cheaper payment to get into that house that they wanted so badly. In a normal market, yes, you would build some equity. But why not add more to your equity by adding to your principal. It would be different if you were responsible and took the savings from the interest only payment and invested it into something else. Something that would give you a greater return than the interest rate that you are paying now. That would be the wise investment. But we know that most people did not do this.

question

My question to the consumer inquiring about an interest only loan would be.... why do you want an interest only loan?

If you told yourself that you could refinance it in a few years, just so that you could get into your dream home now, I would say that is foolish. Here are a few reasons why....

It costs money to refinance. The average typical refinance cost could be around $5,000 to $6,000, depending on what state that you live in. You are now dumping this back into your home, chewing up any equity that was gained in recent years.
Nobody has a crystal ball. How would you determine what the interest rates would be in a few years. You can't predict this 100%.

Summary : Everyone should have a budget. What I see is a $300,000 home in someone's budget, but they use one of these exotic mortgages to buy that $400,000 home, keeping the payment the same or close to it. This is a short term risk, with no long term answers, until you get there. Overall, this is a bad investment. Things that you don't have control over would be loss of job or health issues.

Speak to a mortgage professional that can ask you the appropriate questions and to make you understand what you are doing. To make you look ahead and not just now, what you want now. My clients aren't just a paycheck to me, but my financial responsibility also.

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Posted by Jeff Belonger -- The FHA Expert.com -- FHA Loans -- FHA mortgages - USDA loans on 05/25/2008 01:57 AM

Comments (60)

interest only loans, mortgages, interest only, conventional loans, renting, paying rent

Originally posted at: FHA Mortgage Expert - Tri-State Area - New Jersey/PA/Delaware: Are 'interest only' loans just like renting???

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60 Comments on Are 'interest only' loans just like renting???

MAY

2008

Interest-only works if you are in an appreciating market, and there is a plan to own only until the market stops going up. Interest only is like a 30 year that you refi after a few years.

Too bad so many people got caught wit IO loans

www.ReallyNiceHomes.com

You make some excellent points here and I love the cartoon.

It almost makes me ashamed of writing that book about creative financing back in the 1970's

They don't even consider most of those financing methods risky or edgy any more.

When did manipullative speculation become considered "investing?"

(I'm guessing it was back about 1974 or so.)

Bill Austin

Phoenix Arizona

Interest only loans are not a bad thing - they can even save you money if you pay the principle + overage. They re-amoratize every month and your payment will go down.

Jeff - This is an interesting way to look at this, and it's the first time I have seen this comparison. I agree with your points here. I would never recommend this type of loan, but I have had a few clients who have used them as short-term solutions while waiting for another property to sell.

Interest only loans are not a good idea in a declining or slow appreciation market. Sounded good at the time.

HEATH..... yes and no.... you need more of a plan than what you just mentioned. Prime example, these interest only loans hit their prime and a year later, the market collapsed. So your statement would not be truly correct. Besides, I didn't want to bring investments and appreciation into the picture.

My main point is that in most cases, interest only loans were used for the wrong reasons.... and there is plenty of proof in this one. Just my opinion, but from the stats and figures, this would be right on the money.

FERNANDO.... many got caught because the loan officer gave them what they wanted and didn't ask them the appropriate questions.

BILL...... do you have a link to this book? In any case, don't get me wrong, interest only loans can be a very good loan, but in most cases, were used for one reason and one reason only. To get into the property that they wanted, because they could afford the normal payment. In my opinion, this is poor money management. and thanks for the compliment.

ADAM..... I agree .... but I disagree with your next statement. "they can even save you money if you pay the principle + overage."

Why do an interest only loan then, if you are going to add onto your principal? Do you realize that most interest only loans come with a penalty. Usually you add about a 1/4% onto the rate. In some cases, there are extra points to add to the fees, depending on the type of the product.

Your last statement.... "They re-amoratize every month and your payment will go down.

This is very false, if you are using a normal 30 years fixed rate program, that allows interest only. Those programs that amortizise monthly are loan programs such as the pay option arm. Not trying to sound rude, but you can't make a general blanket statement such as that.

I do appreciate your comments, but these are some of the same reasons why we are in financial difficulty. Loan officers make these same statements every day and don't truly educate the consumer and give them the correct information. Just my .02.

My question is why would someone want a 30 year amortization loan if they are only going to be in a home for a few years and then move? If you had a 30 yr amortization loan for 5 years, the amount applied to the principle is virtually nill. Amortized loans are for people who plan to stay in a home for many many years, like people use to do 20 to 30+ years ago.

Sean Allen

And they sure aren't exotic in the long run for the consumer are they? A great mortgage professional explains all the programs and pros and cons.... I bet all those exotic LO's aren't in the biz anymore either :) Great rundown and advice Jeff.

JASON..... I'll be honest, when they first came out and a consumer inquired about them, I just gave them the rate. About a year later, I started to dissect these and would ask them specific questions to why that they would want an interest only loan.

Overall, it's not that I would not recommend this loan, but would want to know what they, the consumer, would want it. No matter what market that you are in, you need a game plan.

CHUCK..... as I have mentioned to a few people.... in my opinion, it doesn't matter what market we are in. It comes down to what you are going to do with that savings. If you just spend it, it don't make the savings work for you, it will hurt you. Especially in a down market.

SEAN..... I think you are reading to far into this. I never said, do a 30 yr fixed rate. I have done a few 5/1 arms just recently, because they were 3/4% lower than a 30 yr fixed rate.

My whole point to this is, what is your game plan for doing an interest only loan? If you take the money that you saved by doing an interest only loan and just spend it frivolously, then you are being irresponsible in my opinion.

If you reinvest it in something with a greater return than your interest only rate, then you are going in the right direction.

There is a lot more to this... you need to know each clients goals. If you don't ask this and dissect this, then you are just as bad as the person asking for an interest only loan. Again, this is my .02.... but even if you could add $100 a month to your principal, it's a good thing. Some people want secuiry in a 30 yr fixed rate. I will give my clients the scenarios and information to go with it.... but I will never force anything down their throats.

Overall, if you polled everyone that took an interest only loan, I would bet 75% or more of them would say that they did it so they could afford the house. BAD answer in my opinion. Especially if we end up in a down market as we are in now. We need to educate the consumer better than this, than just the answer that you gave. Again, just my opinion on this, but I feel strongly about that.

SALLY..... I would hope that many of these loan officers are out of this business. Just explaining the differences, the pros and cons, are so important and not done often. And thanks for the compliments.

Jeff - For the short-term and with a viable & realistic exit stragedy, not a bad program. I agree with you though, Interest-Only Loans scare me overall. It's a good product for a few people and situations, it should be utilized accordingly. For most, I truly doubt Interest-Only Loans are in their best interests.

JEFF ......

I never put the book online - It was actually typeset on this huge cluncky thing the size of a small office that they called a "Word Processor." I printed a few thousand copies and gave them to my real estate clients back in the late 70's and early 80's. There is a copy or two on file in the Library of Congress along with the copyright notice but I have no idea where to get my hands on a copy right now.

I remember once buying an apartment building by writing a note against the equity in a condominium and then watching the value of both drop by 20-25 percent overnight on December 31, 1984 (Tax Reform Act of 1984.)

I have only done 2 I/O loans. They both knew what they were doing and they both sold their homes for a profit in plenty of time before this credit crunch. That type of loan was never in my repertoire. I never sold unless it was asked for.

Jeff, Thank you for sharing the information. I learn so much on this site and from your posts I'm going to be good when I purchasing again!

Hey Jeff,

I agree, as mortgage professionals we need to talk to the potential buyer/borrower and find out their long term goals and their needs and then direct them to the right financing product. Also, I don't believe that any ARM should be shorter than 5 yrs.

Sean Allen

JASON S. ...... yes, for a short term and with a strategy. But not just so you can get into the house that you couldn't with any normal program. Overall, we agree on this one....

BILL..... I would be interested in reading that book. And yes, things can happen over night. And if you have a risky program to begin with, and things go bad in the economy, you could be in big trouble.

DAVE..... I haven't done that many either. Just like the pay option arms, even though they paid us well. I only think these programs are good for you if you know all about them.... and are in a good position to begin with.

CAROLE...... my pleasure and thanks for stopping by. And if you ever need help in financing, I would be glad to at least be one of the lenders in consideration. I can do NY also.

SEAN...... we at least agree on that part. And in regards to not giving any arm less than 5 years? Again, it all comes down to that person's goals. You just can't say that, depending on their plans and where we are in the market at that time. But thanks for your input...

Jeff,

My own nephew, against my recommendations, is on his second property purchased with an interest only mortgage...he is one of those who invests what would normally go towards principal...I'm wondering, now, with the stock market so erratic, what investments he is making and how they are stacking up to his expectations!!! Thanks, Fran

Jeff, i talked to a customer last week who bought into an IO refi at 80% and never made one payment to principle and at this point is upside down in the house by $5k. The IO plan was a 5 year plan. If he had only made some payments toward the interest he might could refi out of it. 7.5 hurts when it recast.

Jeff I agree everyone should have a budget in mind and just because an interest only loan can entice you to buy more than within your means doesn't mean its the wisest decision. Sure I can buy a Ferrari right now but that doesn't mean I should. cheers on the feature.

Interest only loans are absolutely misunderstand by most in the mortgage business. The type and use of a mortgage is paramount to creating real wealth in America today.

Let's analyze a couple of things: Let's say I bought my home with a fixed rate mortgage 95-100% financing (utilizing the highest rate of interest amoung any mortgage product) and my home depreciates 20% say in 2 years? How is that so different than an actual neg am loan? I mean at the end of the day the consumer owes more than their home is worth.

Homes will go up and down regardless of the mortgage product. The key for all on this post is to fundamentally understand that different product are right for different people and lifestyle needs and financial goals. Trying to put every person into a "one size fits all approach" is well just plain stupid. (sorry - lol)

If you took the after tax payment differential between a strategic interest only loan and a 30 yr fixed for example and simply put that in tax free muni bonds earning say 4.5% - 5.5.% here in CA, you would have enough money to pay off that 30 yr mortgage in only 20.10 years making the exact same payment but simply putting that difference in a side fund.

For the purests, GOD bless ya. You have an opinion and good for you. I clap for you (jello).

For everyone else, interest only loans are completely prudent mortgage products (as are pay option ARMS) given the clients overall life goals. To simply shove them into a box in the 30 yr fixed is simply not prudent nor intelligent.

Interest only loan work for a select few that have a plan and it should not be one that bets on the come looking for appreciation and lower rates. Personally I am a bit conservative for one.

MAY

2008

FRAN.... no sure on that. In today's market, an interest only would not be the wisest of investments. But it all comes down to what you do with the money. thanks

DANNY.... so many just bought into the idea that they would come out ahead. And what was worst of all, were the loan officers that didn't give them options... showed them that it might not be in their best interest. If a consumer doesn't want to listen to my advice and do research on it, I just move onto the next one. Can't help them all... and not all will listen.

JUSTIN.... bingo... you hit it all the head. Hey, I sometimes live beyond my means.... but when it comes to other people's money, I am responsible with it...

MIKE.... after reading your whole comment, I would have to assume that we are on the same page? In regards to the 30 yrs fixed comment? Well, some people will just not budge and want security. I won't fight them on that. The wise ones will listen to what I have to say. But then again, it depends on their whole financial situation. I do thank you for your in depth comment.

PAM..... I am not always conservative... but I will explain it in detail to each and everyone of my clients.

If someone does not have the budget for a home, then they likely should end up renting until they can save the adequate amount. Just our 2 cents.

I live in SF bay area where property prices are way above national average. In this sliding real estate market when there is hardly any equity in home, it is prudent to live on rental than paying interest-only loan payments.

Gary

PS: New Jersey and nationwide short sale and foreclosures.

JEFF - I don't think that a blanket can be thrown over interest only loans and say that they are all bad. Did people overextend themselves with this product? Absolutely! But not everyone that took these loans put themselves into financial difficulty by doing so. The truth of the matter is that these are good products for certain people. For example, someone that is looking to stay in a home for only a few years would not see a tremendous benefit in paying off principle, since the first few years of the mortgage are predominantly interest anyway. Even in a flat market, an interest only would not be tantamount to renting because renters have no tax advantages.

IO loans aren't always a bad thing. If you have a home you know will be short term it a great loan. Less in payments and you wouldn't build much equity in a few years anyhow.

Jeff: Very smart. You sound like the sort of mortgage professional consumers really need. Someone who will look out for them and guide them with the best product that fits their own personal goals and financial standing.

Jeff- Great information. The primary message that I get from your post is that you need to ask the borrowers plenty of questions to help them determine their needs. You take the time to go through their options and educate them on the pros and cons of each program.

I have done the same things with my clients and many of them took IO loans. In my market, vacation homes and investment properties are a big portion of my business. I take the time to run through the various financing options with my clients so that they can make an informed decision. There have been many times that a client has chosen to go with 30 Yr. Fixed when a 5/1 ARM or even an IO product better fit the profile of their needs. I'm ok with whatever the decision is, as long as the customer is making an informed decision based.

Jeff,

Interesting perspective... There definitely is a place for interest only and other highly structured mortgage products.... What seemed to turn the capital market upside down in recent years was when those products were rolled out in mass to people who only focus on the monthly payment and cash flow, and not the bigger picture of how their mortgage and home fits into their total long term financial plan.

On the heels of these challenging times, hopefully more people tune into the logic of your post and weigh the full cost / benefit of their purchase decision and base affordability on what they can truly afford, and not necessarily the maximum of what the capital market will allow them to purchase.

In my area I also caution people to budget as if there was only one income. (If there are two purchasers.) Those interest only mortgages are too darned risky in my humble opinion.

Are these loans still available? I can't believe someone would use one in most cases. The one client I had who used this loan (not at my suggestion) had to be bailed out with a short sale about a year later.

BOB & CARLIN....... bingo and I will be writing a blog on this... thanks... just as the comment that I leave Gary, below...

GARY..... good point.... renting is not always a bad thing, depending on what it was going to cost you to buy.... output and monthly payement, compared to lower rent payment and savings.... as long as you put that savings aside.

ADAM.... I never said that they were bad loans. If it came off that way, I apologizze... But I am not really going to come out and make that statement in my post, that they are great. I just let people know that in many cases, these aren't the best types of programs for you, if explained correctly... if someone walks you through them correctly, making you understand them. If you use them properly, they can be very good for you, especially in the short term... but not just for that low, low payment to get into that house, just because you are keeping up with the Jone's..... and one thing... even short term, they might not be the best fit for you, depending on your goals. Just my opinion.... and you did bring up tax advantages in buying... but, again, it depends.... not always. It depends on what your rent was and what your new mortgage payment was. It could actually be cheaper to rent then. But thanks for bringing that up.

CHIP...... I pretty much covered this in my response to Adam, above you. Again, they can be good.... but even in a short term, not always. It goes back to goals and being responsible. Just my opinion.... but with 16 years of experience in the lending industry, I think I have a very good handle on this.

DONNA.... thank you very much. I like to explain...I am not perfect, but I really do try and I do care. It does seem like I preach a lot, but I do try to follow what I talk about...... and I am human, meaning that I might not follow all of this all of the time, but at least 99% of the time. It just depends on how the conversation started and what they are looking for. But again, thanks for the kind words.

DOUGLAS..... 110%.... asking about 15 minutes how questions..... I listed these questions in this post, that's if you didn't get a chance to read it as of yet. A letter to your loan officer from you, the consumer...... Overall, thanks for the kind words and for the compliment.

CHRIS.... exactly, when rolled out in the masses. It all comes down to education and not just the lowest payment. Hence what happened to so many with the Pay Option Arms. So many saw the low payment and many loan officers didn't make sure that they understood the pros and cons. Or what would happen next year or in 3 years. I know this for a fact. Not only because of one office within my company that shold these only, but didn't know what a FHA loan or a subprime loan was... (what did this tell you)... and because I would get about 4 to 6 people that would call me, asking me how they could get out of this loan.

KRIS...... many of us agree with that statement. Yes, these can be good programs, even with the risk, but they are for only 5% of the population. They need to be used responsibly. thanks

Interest Only was always a great option for a trailing spouse situation or even a self employed borrower who experienced seasonal income.

Unfortunately, too many people used it to keep up with the Joneses.

Just like anything good.... some people will ruin it for the rest of us.

An interest only loan is a bad thing. It is a lease with the option to buy. It is the real estate equivalant to a stock options/futures market. Only in this case, the counter party is not a solid company like Enron or Bear Stearns (Ha HA) it is someone (who last year) put no money into the deal. This is one of the big contributing factors as to why we are in a bursting bubble today.

A interest only loan doesn't mean you are bad or will default when the going gets rough, it is however what a non-commiting flipper would chose if given the choice (with no money down and negative am being the first choices).

Who wouldn't (amoung those lacking morals) want to make a bet using someone else's money; if I win, I get cash, if I lose, too bad for the bank. The I/O loan fits their needs to a T.

I am a fan of Interest Only Loans and they work perfect for my husband and I. The only thing is that you need discipline to make yourself pay extra towards the principal every month. These loans are perfect for commissioned type people who need the comfort of a lower monthly payment but have the discipline to pay down the mortgage payment once a large commission check comes in.

They are not for people to be able to purchase more home than they can afford! I think consumers are equally to blame for getting themselves into homes that they can not afford. It is the same reason why Americans are encumbered with credit card debit. Too many are living beyond their means.

The main problem, difficulty or challenge (as you point to) is that people need to approach buying a home as a major business decision. Many do not. Too, many have been conditioned to thiink in terms of "monthly payments" from their mortgage to their TV. The number one thing I have our clients consider is appreciation and resale. In ten years, do you still want to be chained to monthly payments and have nothing in the bank?

Morning Jeff, the whole concept of an interest only loan sounds like the term "loan shark"... pay me forever, your principal never goes down and we basically own you! Not good deal. :-( Have a great weekend!

Great points and comparisons.

Jeff, the interest rate option, in all likelihood, will be regulated away. Right or wrong that loan serves as the Poster child for financial instruments that go bad. Your points are well taken. There are just too many variables to justify the risk IMHO.

TOM B. ..... a trailing spouse? still not sure this would be good for that. Maybe a 5/1 arm instead. But sure, a commissioned person, yes. And yes, it was so many wanting to keep up with the Joneses.

CONSUMER..... well, I would have to disagree with most of your comment. No, interest only loans is not a bad loan. It's just not for most or many. You need to be disciplined. Secondly, this is not the major contributing factor to why we are in this whole upside down dilemma. More would be because of the pay option arms and 2/28s.... lenders could have put semi bad credit, less than perfect credit consumers into lower rates with FHA mortgages. Just my opinion, but with 16 years worth of lending experience.

Another issue with today's problems are just not based on bad mortgages. remember, the economy hasn't been that great in several years and loss of jobs have hurt certain markets. Why do you think Michigan and Ohio have high foreclosure rates? A lot has to do with loss of jobs, with the fact that some were put into bad loans. thanks for your input.

KERRY.. aka power brokers....... it's great that these types of loans work for you. But I have a question for you. Why are you doing an interest only loan and then applying more to the principal?

At 6% on a $300,000 loan, P & I, your payment is $1,798/ month. After 5 years, your principal will be $279,163. At a 6.25% interest only rate, your payment would be $1,562 a month. This program has a hit of a 1/4% when doing an interest only loan. This would be a savings of $236 a month. But, in 5 years, your balance will still be $300,000. If you took the difference of what you were saving and applied it back onto your payment, you would actually owe over $283,000 in 5 years.

So, my question to you and your husband would be, why take an interest only loan and add something onto your principal. In my opinion, you are defeating the whole purpose of an IO loan. When you do an IO loan and you are responsible with your savings, you should invest it in something else that gives you a greater return. A return that would pay back over 8%, which can be obtained through the stock market.

This is just something that both you and your husband should think about next time, when taking an IO loan. Just my opinion...

THE HARPER-MEES Team..... yes, approach it as a business.... but with a plan though. As you stated, so many just worry about the payment. But I also blame this on many of the loan officers out there. Not educating the consumer and just giving them payment.

MARTI..... hhhmmm.... yes and no.. it depends on how you used the loan and what you saved. In regards to a loan shark, you paid higher interest ..... and there is more to it, but it could be looked like this. thanks and you have a great weekend also. thanks

Mortgage Oasis..... thanks for the polite compliments..

ANDREW...... not sure about it being regulated away... but it is much, much tougher in getting it. When the subprime market a few years ago opened this up to those with credit scores under 600, even 620, it was like letting a swarm of bees out of a cave with people standing on the other side... just not awise move. It was called greed on Wall Street.

Jeff, this was a very interesting post, with very interesting comments, both for and against the IO loans. My perspective, is that I took a Pay Option/Interst Only loan when I needed to remove my father's name from the title on my property (he had cosigned when I bought it some 12 years earlier, I made all the payments). At the time I needed to refi, It was the only available No Doc/ Stated Asset product available, and I desperately need that also. However, I vowed to my lender, a good friend, that I would make additional paytments towards principal every month, and have done so religously for the past two years. It takes discipline, and I am sure that this does not fit the mold for most consumers. I too think that most people should avoid this type of loan like the plague.

Interest only loans allow me to use my money on other investments, further building my investment portfolio. When used correctly, interest only loans are the way to go.

Jeff, this sounds like good advice. Is it true that most of the higher dollar homes in the multi-million dollar range are often interest only? This is just hear say for me. I'm not out buying in that range! lol

Later in the rain~Deb

Interest only, option ARM. stated-income, no-doc, low-doc, neg amort, etc etc, etc ... can be useful financing tools, if used wisely and judiciously.

But put them in the hands of Joe Sixpack, along with a fairy tale or three: "You can refinance before the rate hike!" and "Real estate never goes down!" and "The more house you buy, the more money you make when you sell!" and you get the kind of mess we have right now.

I know finance and *I* refuse exotic finance. All my real estate has fixed, conforming mortgages, refinanced ~5%. Why on Earth would anyone with good FICO and cash on hand choose a variable to cut a meager 0.5% off the initial rate and then risk adjustments? That's reckless.

I'd also like to address the: "It frees up my money for other investments" school of thought. That's fine when the property and the investments are doing well, but when markets are tanking, as they are now, it's lose-lose. You lose with every rate hike and on the investments.

In 04, 05, 06, with the Dow growing 10, 15%, the property growing 10% and the ARM still at 4.5%, it was fat city.

Living off the bank's money? That was financial genius.

But now you're paying 6%, 7% - maybe more - to use that money. And very few investments are returning more than that in this market.

Now it's financial suicide.

Hi Jeff someone likely has addressed your post title question...but the main difference between Renting and an Interest Only Loan from my understanding is:

UNLIKE RENTING- Mortgage INTEREST and Property Taxes are generally tax deductible so even if you only pay the interest due - you'd still enjoy a tax benefit that renters do NOT with or without appreciation. I'm not a tax advisor but if your individual circumstances provide that your mortgage interest is tax deductible...the Tax advantage is one Renters are not afforded.

Great blog on asking the consumer why they really want that interest only loan. Too bad so many people didn't listen back when.

Hi Jeff. I'm late to the party, but I thought I'd share the reasons I have an interest only loan.

I have an interest-only loan on an investment property. The interest-only period is for 10 years. In essence, I get to make an interest-only payment on the home for 10 years. I suppose it is like renting...except:

Over ten years, the value of the home will probably appreciate.
Over ten years, the price of rent I charge will probably appreciate.
Over ten years, my income will probably appreciate.
Under current tax law, I write off the interest.
After ten years, the loan has a good 20yr fixed rate.

With a regular 30-year fixed, the payment goes mostly to principal for 22 years anyways. I took into consideration the risks before choosing this type of loan.

Not for everyone. But, for me, it works.

Interest only is scary these days, unless the person HAS the capital, but chooses not to use it thus at this time.

We bought our home in 1990, when interest rates were in the teens, if I recall. Even then I was afraid of a variable!!

MICHAEL.... again, you have to be responsible when taking the kind of loan that you did.... but that was the only loan available as a stated or no doc, 2 years ago? Even then, there were others out there, but I would have needed to know your credit score and LTV at that time. But any case, you can still make the minimum payments on your type of loan, depending on what you did with the difference of payment. Spending it all, will usually leave you in a bad place in 2 years, no matter what.

BRIAN..... yes, the key words being, "used properly". But the average person in these types of loans didn't use them wisely or properly. Hence why I never said that I hated these types of loans or that they are bad... but that you need to speak to a mortgage professional that would not only ask the right questions, but explain all of this to you.... both the pros and cons...

DEB..... thanks for the compliment. In regards to the higher priced homes, having these types of mortgages? Not 100% sure.... especially depending on your definition of 'high priced' homes. To some, $300,000 could be high priced... and to many others, $750,000 or more could be high priced.... overall, I have seen interest only loans done on all types of dollar amounts, low and high. thanks

ROBERT..... in regards to your first statement, as I have mentioned several times, yes, I agree. But it's not for everyone. And those loan officers that didn't give the specifics to their clients, the pros and cons, did their clients a disservice. .. at least in my opinion.

In regards to your second statement, about Joe Sixpack... again, it comes down to the knowledge of the loan officer and how much time they took to explain everything to their client. But I have heard more than several tell their client, personally, "don't worry, you will gain equity", etc etc.. Sure, but there is no specific time. Sure, in 20 years... but what about in 1 year? It also depends on the clients goals. All of which need to be dissected.

But in regards to your other comment, "I know finance and *I* refuse exotic finance. All my real estate has fixed, conforming mortgages, refinanced ~5%. Why on Earth would anyone with good FICO and cash on hand choose a variable to cut a meager 0.5% off the initial rate and then risk adjustments? That's reckless."

I disagree, it's not reckless.... depending again, on your goals and what you actually do with the savings. And it also comes down to your loan amount. The great the loan amount, the larger the savings. And sure, this can be debatable.... but the figures don't always lie.

TERESA...... you bring up a great point... but yes and no.... just because you are recieving a taxwrite-off on both interest and your property taxes doesn't mean that owning your home is always better than just renting. Why do I say this? It also depends on what your rent was and what your new mortgage payment is. If doubled in mtg payment, I could save more money on the difference between my rent and current payment payment with tax benefit. I will show this in one of my next posts. And hence why more people are renting now after selling their current home in some areas. With values still coming down, this can make sense. At least 1 1/2 years ago, it was actually great advice. Some values have come down since then and so did rates. Again, numbers don't lie... my overall input about this, you need to compare apples to apples to make your statement true. thanks for your input.

RUSS.... loan officers should at least ask, give comparisons, and educate. But many did not. Sad, but so true. They just gave the consumer what they wanted. And sometimes in fear of losing that client, because they were upfront with them and or asked questions.

JOEY..... late? never, as long as you bring the dip, chips, and the beer. ;o)

Seriously... you make some excellent points. But again, this is not for everyone, because you also have to be disciplined. What do you do with the money saved, if you don't mind me asking. Overall, these programs, such as the pay option arms, are great. But again, you need to have a plan and stick to it. Not just to do these types of loans to save money and spend that savings on trips and such. This is my opinion... and thanks for sharing yours, because I agree with the thought process.

CAROL.... you don't always need to have capital or equity to do these loans. Just smart and disciplined. At least in my opinion...
thanks

Jeff - you raise some rally good questions here about these types of loans. I can't understand why someone would want to pursue this type of loan, especially in this market. The appeal, of course, is the lower payment, without folks really considering the potential consequences.

Jeff

MAY

2008

I have had interest only loans as well as neg am loans. In an appreciating market they work great, In todays market they stink.

Jtff, thank you for informative post. I'm interested on this problem too. I'd like to tell you about my favourite resource. Hope, you'll find it informative. I suppose that mortgage calculators will be usefull for you.

Jeff, Creative financing and interest only loans are not the answer for all situations. You definitely need to understand the motivation of the borrower. (I'm glad you do this -- can you write for Florida?) I've seen so many first time buyers led astray and end up on the brink of financial ruin because they didn't read and understand the terms.

JEFF D. .... thanks... but even in a down market, these types of mortgages could be a good thing. It comes down to your goals and how responsible that you are with the savings.

BRETT.... again, as I mentioned to Jeff D., they can work in any market. It depends on your goals, which is so key. And what you do with the savings is very important.

KAROLINA..... my pleasure... I think we need to educate consumers and everyone else, more and more on these issues.

JoELLEN..... so true..... and understanding the borrower is so important, I can't stress enough on this. I can't tell you how many clients that I speak to that tell me that they were told what they were qualified for and that was it. If you get a chance, please read this one.... A letter to your loan officer from you, the consumer......

I talk about the things that should be asked... thanks And yes, I can do loans in Florida and have done many, both purchases and refinances.

Hi Jeff, I have an interest only loan. I chose one because I was going through a divorce and knew I would not be able to qualify for my home on my own for several years because I had not been working full time. I wanted to live in a nice area of town. My house has a little rental apartment on it and that helps me make my mortgage every month.

The interest only loan that I have enables me to be okay in tight months and also I have no penalty for paying down principal along the way, which I have been doing.

It was absolutely worth it to me, because I know i will be able to refinance in a couple of years and, who knows, the interest rate may even be better than it is now!

So, you see, there ARE some people who see the interest only loan as a really good thing!

Interest only has it place on short term.

What a great topic to get people talking and discussing a important subject. Personally I think your heading is questionable, but isn't that the point? Prior to getting back into the real estate field. I spent the last 7 years as a mortgage banker both in Florida and Georgia. The two markets are totally different and are more so today.

As for the interest only loan programs available today, they are useless due to the aggravated interest rates, in many cases with higher rates than conventional. Four years ago, they were the best for a large portion of the buying community. Not because they could get more house for the money, but rather could capitalize on the effect they could have on their principal if they treated their payments as if they were fully amortized. Take into the fact that most people seldom stay in a home more that 4 years and you had a win-win situation. The key was two fold; the loan officer had to make sure the consumer understood what needed to be done and the consumer had to follow the direction of the LO. As with all things, people have a tendency to fall short of the mark. Was it better than renting, yes. Is it a good product today, not really. FHA will be the next best thing available for today's consumer.

To all the realtors out there, I suggest making sure that your loan officer is well versed on the subject, and remember when it comes to the government, nothing goes fast.

EMILY.... I never said that interest only loans were bad. My main point of this whole post was to educate everyone and to say that you need to be asked many questions, to determine if this is right for you. And to know both the cons and pros. Refinancing is great, but it costs money to refinance, no matter what anyone tells you. It will eat up some of your equity and with the higher loan amount, it will add to your payment. And just a FYI... on most interest only loans, they add about a 1/4% onto your rate as a penalty for doing these types of loans.

Overall, yes, it has helped you, but I would put money on it that the loan officer didn't show you the worst case scenario in 2 years... even if you paid down your mortgage by $1,000 in the next year or so. And who knows, there might have been another way of doing this. If you don't mind me asking... and you can do it in an e-mail...what was your loan amount, how much did you put down on the property, and at what rate? thanks

STEVEN.... that's not 100% true, especially if you read most of my responses to these comments. It all comes down to your goals and what you do with the extra money that you are saving because of the interest only loan.

MARK..... aren't headings suppose to be intriguing and capturing? Besides, I never said that my title was 110% true, yet that it has some truth and merit to it.

The rates as I mentioned on IO loans are only a 1/4% higher in most cases. In regards to your one comment... "Four years ago, they were the best for a large portion of the buying community. Not because they could get more house for the money, but rather could capitalize on the effect they could have on their principal if they treated their payments as if they were fully amortized."

If I am reading your comment correctly, are you saying that they would just add back the difference of their payment to the principal? Please clarify....

The average person stays in their house about 6 years, so I am not sure where you got the 4 yrs average.

Overall.... you can't say buying is better than renting. That is a blanket statement. It also depends on how much your mortgage payment would increase over your rent payment. There are too many wholes in your statement and these can be proven with calculated figures.

Any product can be good, if utilized correctly and not abused. But it takes discipline. thanks for your input.

JUN

2008

they should not have let everyine qualify for a loan using the interest only payment.that was the crazy part.

MAR

Interest-only loans suck!

That is my opinion. I am stuck in one now. Yes I know its my fault for not reading the fine print, blah, blah, blah... I do not recommend an I/O loan to anyone. Right now I am stuck and there is no way out. If anyone does know a way out, please let me know.

Thanks.

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