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Old 10-23-2008, 12:32 PM
 
513 posts, read 2,106,679 times
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Question for all you helpful mortgage specialists!! Is there any reason NOT to do an interest-only loan? We will be putting down 20%, so will have decent equity, assuming our home value doesn't go down (it's new construction). I realize we won't be gaining any equity, but I'm not too worried about that right now as we hope to be in our house for at least 10-15 years. What about an interest-only 5/1 ARM? Just trying to keep payments low. Thanks!!
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Old 10-23-2008, 12:37 PM
 
Location: Columbia, SC
1,859 posts, read 5,016,606 times
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Quote:
Originally Posted by marblmom View Post
Question for all you helpful mortgage specialists!! Is there any reason NOT to do an interest-only loan? We will be putting down 20%, so will have decent equity, assuming our home value doesn't go down (it's new construction). I realize we won't be gaining any equity, but I'm not too worried about that right now as we hope to be in our house for at least 10-15 years. What about an interest-only 5/1 ARM? Just trying to keep payments low. Thanks!!
If you can get a fixed rate (highly doubtful) then that might be okay, if not, would definitely advise against it as fixed mortgage rates are very nice right now. Hope you've been paying attention to the news the past year w/all the foreclosures, the majority of which were on the types of loans you're discussing b/c I know everything may be going well right now in your life, but if that ARM adjusts upward and some life event happens, good night. Not sure why you would want an interest only any how when you are able to put 20% down. Your payment really won't be that much more with principal and interest than just paying interest.
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Old 10-23-2008, 12:59 PM
 
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I could see why you want to do Interest Only.

If you have cash in hand, this would be ideal. You can pay interest only until interest rate goes up. When it does, you can pay the whole thing off. During that time, you can pay principal if you want to as an option. It won't be mandatory like fixed rate is. If not, just keep on paying interest only. As long as you don't get penalized by paying principal or paying the total amount. * most do have penalties.
This would be for investors who has money and want to purchase many properties but don't forget. Don't over due yourself.
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Old 10-23-2008, 05:01 PM
 
Location: Norfolk, VA
1,036 posts, read 3,964,185 times
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Interest only isnt a good deal right now. It has its uses as do ARMs, and both can be great options when used properly.

The problem right now is Fannie Mae/Freddie Mac and therefore most lenders are charging a big premium for interest only. This results in you paying a higher interest rate OR more fees. When I/O and amortizing loans were at almost the same rate I would recommend them more, but right now its rarely worth it. Same with ARMs... there isnt as much of a discount in rate on an ARM considering the higher risks perceived by lenders.

The best option is to ask for quotes on all the options and compare for yourself. If needed, ask a financial advisor or us for opinions once you know the different terms available to you.
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Old 10-23-2008, 05:37 PM
 
Location: Plano, Texas
1,673 posts, read 7,008,907 times
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I am a fan of interest only loans but rcarrillo makes a good point. Rates on interest only loans have jumped up, so you will take a higher rate or pay more fees.

A benefit of interest only is that it allows you to build up your savings and not bury your money into your home. Put your money to work where home equity is the worst investment as it gets you no rate of return. Plus home equity is not liquid, cash is king.

there are many benefits of interest only loans but you must make sure you use them with caution.

The 5/1 interest only arm is not a bad option, most people do not realize that the average life of a home owner in a home is 5 to 7 years, but the average life of a loan is just over 4 years. so, most people that do a fixed rate mortgage, still refinance in about 4 years.
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Old 10-23-2008, 06:07 PM
 
513 posts, read 2,106,679 times
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Thanks for all the info. We actually lucked out and locked a rate back before the sky fell - the rate is pretty good. I'm more worried about the 5/1 ARM aspect than the interest only.
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Old 10-23-2008, 06:38 PM
 
Location: Plano, Texas
1,673 posts, read 7,008,907 times
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Quote:
Originally Posted by marblmom View Post
Thanks for all the info. We actually lucked out and locked a rate back before the sky fell - the rate is pretty good. I'm more worried about the 5/1 ARM aspect than the interest only.
What rate and what program did you lock into?
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Old 10-23-2008, 06:39 PM
 
Location: Norfolk, VA
1,036 posts, read 3,964,185 times
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Quote:
Originally Posted by marblmom View Post
Thanks for all the info. We actually lucked out and locked a rate back before the sky fell - the rate is pretty good. I'm more worried about the 5/1 ARM aspect than the interest only.
That is the trickier part. As long as there is no pre-pay penalty you can always pay principle if you want. Interest only just gives you the option of a lower, interest only payment. As long as you use that option wisely (use the savings to pay off debt or save, not waste it) it is a good thing. The only issue with I/O is the potentially higher rate as I mentioned.

The ARM part is trickier... you can't predict what will happen to rates and home prices in 5 years. If things go bad, you might not have an exit strategy as many others have learned. Then your only option is to save now and make sure you can pay the higher mortgage if it comes to that.
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Old 10-23-2008, 09:13 PM
 
513 posts, read 2,106,679 times
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Quote:
Originally Posted by VictorBurek View Post
What rate and what program did you lock into?
Locked into a 5/1 ARM, interest only at 5.625%. No points, no orig fee, no prepayment penalty. We have a free floatdown option, so I'm really hoping the rates go down a bit before we have to close. Then maybe we could do a 30 yr fixed.
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Old 10-24-2008, 02:28 AM
 
Location: Plano, Texas
1,673 posts, read 7,008,907 times
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Quote:
Originally Posted by marblmom View Post
Locked into a 5/1 ARM, interest only at 5.625%. No points, no orig fee, no prepayment penalty. We have a free floatdown option, so I'm really hoping the rates go down a bit before we have to close. Then maybe we could do a 30 yr fixed.
That is a good rate with no points. I would now suggest you ask your loan officer what the rate would be if you paid a point. by paying a point, you should be able to get about .375% lower rate. At the lower rate, you will recoup the point paid in less then 3 years. And loan origination is tax deductible.
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