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nixy
LIF Adult
Member since 9/06 1575 total posts
Name:
K
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Interest Only Mortgages
I don't want one, I already have a mortgage (and one is more than enough for me!!!)
But, I do want to know how do they work?
Do they reasses the value of your house every year? b/c people keep saying that with the value of houses dropping that those with an I/O mortgage are no longer going to be able to afford it. Or is this only b/c the interest rate is variable and it can go up?
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Posted 11/29/06 3:49 PM  |
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jellybean78
:)
Member since 8/06 13103 total posts
Name:
Mommy
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Re: Interest Only Mortgages
Correct me if I'm wrong but I think that the way an interest only mortgage works is that you take it out for a set amount of time i.e. 5 years. You only pay interest for that set time. After the 5 years you have to refinance the entire amount you purchased for. So you may be out of luck if you purchased for $350 and now you have to refinance and it only appraises for $300.
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| Posted 11/29/06 3:54 PM |
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MikesWife
Wanting...........
Member since 1/06 6887 total posts
Name:
Karen
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Re: Interest Only Mortgages
Posted by nixy
I don't want one, I already have a mortgage (and one is more than enough for me!!!)
But, I do want to know how do they work?
Do they reasses the value of your house every year? b/c people keep saying that with the value of houses dropping that those with an I/O mortgage are no longer going to be able to afford it. Or is this only b/c the interest rate is variable and it can go up?
I believe that the rate remains the same. Only on an adjustable will the rate change.
The thing with interest only mortgages is that you are never paying down the principal - just the interest. Therefore, you can go to refinance to a standard mortgage and be in the hole because you now have a balance from the IO mortgage greater than what the bank is now willing to give you because it has now appraised for less.
Does that make sense? Or am I rambling???
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| Posted 11/29/06 3:54 PM |
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MegZee
My bunny
Member since 5/06 8777 total posts
Name:
Meaghan
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Re: Interest Only Mortgages
no, its because not only is the interest rate variable, you arent paying any principal down (unless you are making extra payments to do so).
I/Os arent bad necessarily, they just arent for most people - since housing prices became insane - this is how some people could afford a home they wouldnt be able to with a traditional mortgage.
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| Posted 11/29/06 3:54 PM |
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Beth
The Key to your new home....
Member since 2/06 24849 total posts
Name:
Beth
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Re: Interest Only Mortgages
rates can go up if you have an adjustable
ok- here is the best way I can explain it
I want a $1M house- but I can't afford a $1M house in 2004
so I buy it anyway- but I do an I/O adjustable loan ( there is also something called a neg am loan- which is the same thing except you don't pay all the interest and it's tacked back on the principle and then you owe more then when you started)
so every month you are paying $3500 for your $1M
now flash forward to 2007- you rate has expired- you owe more then your house is worth so you can't even sell it
you can't re-fi b/c you can't afford the payment of fixed 30 year mortgage
so you are basically screwed- b/c
1- you thought the house would be worth $1.5M and it's not
2- you were in over your head to begin with
alot of people did this-
personally I am doing an i/o fixed rate mortgage- b/c my DH is a mortage banker meaning he doesn't make a set amount everymonth and some months we will pay more then the minium interest only payment
interest only's aren't all bad- the problem was people bought more house then they could afford
I hope that makes sense- if I missed anything or messed anything up feel free to correct me
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| Posted 11/29/06 3:56 PM |
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lululu
LIF Adult
Member since 7/05 9511 total posts
Name:
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Re: Interest Only Mortgages
I will describe the IO that my husband and I have. It is a 30yr mortgage with a 5 year ARM (adjustable rate mortgage) IO (Interest only). For the first 5 years our interest rate is fixed and we only pay interest on the loan (nothing goes towards the principal). At the 5 yr mark the loan will become an adjustable rate mortgage - meaning that the interest rate will re-set based on the rates at that time.
People speak about not being able to afford the loan because if rates have risen, your mortgage rate will go up at the 5 year mark, plus you will have to start paying down the principal at that point as well. These factors could make your monthly payment increase a lot.
If you need to sell your house and the value of your house has declined, you may not be able to cover the outstanding mortgage since you havent paid down any of the principal.
In my opinion - only somewhat sophisticated buyers should get an IO ARM. It can be risky if you dont know all of the facts and you are just lurred in by the smaller payments.
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| Posted 11/29/06 3:56 PM |
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MegZee
My bunny
Member since 5/06 8777 total posts
Name:
Meaghan
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Re: Interest Only Mortgages
In my opinion - only somewhat sophisticated buyers should get an IO ARM. It can be risky if you dont know all of the facts and you are just lurred in by the smaller payments.
EXACTLY! they aren't "bad" - they are just not for most buyers.
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| Posted 11/29/06 3:58 PM |
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lululu
LIF Adult
Member since 7/05 9511 total posts
Name:
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Re: Interest Only Mortgages
Posted by Beth1210
personally I am doing an i/o fixed rate mortgage- b/c my DH is a mortage banker meaning he doesn't make a set amount everymonth and some months we will pay more then the minium interest only payment
interest only's aren't all bad- the problem was people bought more house then they could afford
IO's are particularly appealing to people that work on commission or people who earn a substaintail portiion of their income in the form of periodic bonuses. They allow you to pay down principal, without penalty or charges.
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| Posted 11/29/06 4:00 PM |
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lululu
LIF Adult
Member since 7/05 9511 total posts
Name:
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Re: Interest Only Mortgages
oops sorry - double post!
Message edited 11/29/2006 4:00:57 PM.
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| Posted 11/29/06 4:00 PM |
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Beth
The Key to your new home....
Member since 2/06 24849 total posts
Name:
Beth
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Re: Interest Only Mortgages
Posted by Meaghan729
In my opinion - only somewhat sophisticated buyers should get an IO ARM. It can be risky if you dont know all of the facts and you are just lurred in by the smaller payments.
EXACTLY! they aren't "bad" - they are just not for most buyers.
it's perfect for us- but it's not perfect for most people!
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| Posted 11/29/06 4:00 PM |
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jellybean78
:)
Member since 8/06 13103 total posts
Name:
Mommy
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Re: Interest Only Mortgages
You can pay the principal down on an IO if you choose. My GF has an IO on her coop and she will put extra $$$ towards the principal on certain months. IMO these loans are good for people who work on commission and don't have a steady income every month to pay a bigger mortgage but have enough discipline to save or put down extra $$$ when they have it available .
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| Posted 11/29/06 4:01 PM |
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nixy
LIF Adult
Member since 9/06 1575 total posts
Name:
K
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Re: Interest Only Mortgages
Posted by Beth1210
neg am loan- which is the same thing except you don't pay all the interest and it's tacked back on the principle and then you owe more then when you started
The neg am loan just sounds like a recipie for disaster.....
But thank you all for the explanations, I learned something new today.
And I also learned that my fixed works for me b/c this I/O thing would STRESS me out! I am not a sophisticated buyer!!!
Message edited 11/30/2006 9:08:22 AM.
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| Posted 11/29/06 4:02 PM |
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MegZee
My bunny
Member since 5/06 8777 total posts
Name:
Meaghan
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Re: Interest Only Mortgages
The neg am loan just sounds like a recipie for disaster.....
Negative Amortization loans  what willl they think of next????
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| Posted 11/29/06 4:03 PM |
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lululu
LIF Adult
Member since 7/05 9511 total posts
Name:
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Re: Interest Only Mortgages
Posted by nixy
Posted by Beth1210
neg am loan- which is the same thing except you don't pay all the interest and it's tacked back on the principle and then you owe more then when you started
The neg am loan just sounds like a recipie for disaster.....
But thank you all for the explanations, I learned something new today.
And I also learned that my 30y fixed works for me b/c this I/O thing would STRESS me out! I am not a sophisticated buyer!!!
I think that 15/20/30 yr FR loans are probably better for 95% of the population! you are not alone!
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| Posted 11/29/06 4:04 PM |
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sunnyplus3
:)
Member since 11/05 8749 total posts
Name:
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Re: Interest Only Mortgages
the feds are changing a lot of the lending guidelines to reduce the number of liar loan I/Os....people who TRULY make the money to pay but not on a conventional schedule are fine, its the people that took no docs & now have no way out.
I know two people that have homes that appraise for 50-60 LESS than what they OWE since they bought last year.
If something major happens-job loss, ilness they are SCREWED & they know it, personally I'd have irriitable bowel syndrome day & night if I had to worry about that.
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| Posted 11/29/06 4:06 PM |
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lululu
LIF Adult
Member since 7/05 9511 total posts
Name:
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Re: Interest Only Mortgages
Posted by KellyFG
the feds are changing a lot of the lending guidelines to reduce the number of liar loan I/Os....people who TRULY make the money to pay but not on a conventional schedule are fine, its the people that took no docs & now have no way out.
I know two people that have homes that appraise for 50-60 LESS than what they OWE since they bought last year.
If something major happens-job loss, ilness they are SCREWED & they know it, personally I'd have irriitable bowel syndrome day & night if I had to worry about that.
I am so conservative i dont know how people can get themselves into these situations. I literally would not be able to sleep at night knowing that one set back and i could lose my home. I definitely think that the banks should have stricter rules on who can get these loans.
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| Posted 11/29/06 4:08 PM |
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Ang-Rich
Beyond Compare
Member since 5/05 17988 total posts
Name:
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Re: Interest Only Mortgages
Posted by lululu
In my opinion - only somewhat sophisticated buyers should get an IO ARM. It can be risky if you dont know all of the facts and you are just lurred in by the smaller payments.
I agree with this completely! And in my opinion, very few people can make this work....as ARMS are up more houses are dumped on the market and foreclosures become a reality. People are usually left in a really bad spot...one of those living outside their means kind of things. It is definitely a very serious decision to make...and honestly one that DH and I decided against..as responsible and financially strong as we are...we know this is not for us...but on the flip side...this is one of those things where when people do make it work...I find it completely impressive.
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| Posted 11/29/06 4:17 PM |
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SweetTooth
I'm a tired mommy!
Member since 12/05 20105 total posts
Name:
Lauren
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Re: Interest Only Mortgages
If you have an I/O loan, then you are you gaining equity in the years you are only paying interest? Or does the equity only kick in once you start paying the principle?
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| Posted 11/29/06 4:21 PM |
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lululu
LIF Adult
Member since 7/05 9511 total posts
Name:
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Re: Interest Only Mortgages
Posted by SweetTooth
If you have an I/O loan, then you are you gaining equity in the years you are only paying interest? Or does the equity only kick in once you start paying the principle?
Well you get equity in two ways - the first is by paying down the principal, which with an IO will only happen once you start paying it; the second way is if your house appreciates.
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| Posted 11/29/06 4:22 PM |
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MrsRbk
<3 <3 <3 <3
Member since 1/06 19197 total posts
Name:
Michelle
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Re: Interest Only Mortgages
We have an I/O mortgage. We did not buy more house than we can afford. We have a 10 year fixed rate. DH's intention is to pay the mortgage off in less than 10 years. We have just a little more than half the mortgage paid down already, and we pay an extra $1000-$1500 per month towards the principle. We were fortunate that with the sale of DH's condo earlier this year (all for profit as he carried no mortgage on it) and with a very nice bonus, we were able to pay down more than half. It works for us.
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| Posted 11/29/06 4:27 PM |
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CaMacho
Sisters :)
Member since 7/06 15112 total posts
Name:
Jess
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Re: Interest Only Mortgages
I actually never really knew this type of mortgage existed. Can most people be approved for an I/O mortgage?
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| Posted 11/29/06 4:30 PM |
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SweetestOfPeas
J'taime Paris!
Member since 3/06 32345 total posts
Name:
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Re: Interest Only Mortgages
I still can't believe lenders were allowed to offer these "creative loans"
it is NOT in your best interest to not pay down the principal! ESPECIALLY in this market!
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| Posted 11/29/06 4:30 PM |
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MegZee
My bunny
Member since 5/06 8777 total posts
Name:
Meaghan
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Re: Interest Only Mortgages
Posted by CaMacho
I actually never really knew this type of mortgage existed. Can most people be approved for an I/O mortgage?
absolutely. its easier to get approved for because they payment will be lower.
MrsRBK - your husband sounds very debt adverse - and you are the picture of what I/O's are good for - he gets a nice bonus and pays down principal with it. Unfortunately I know people with I/O's that only have them bc they can't afford to pay any principal, and figured that their house would appreciate in the near future so they can buy another house with the equity.
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| Posted 11/29/06 4:32 PM |
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Beth
The Key to your new home....
Member since 2/06 24849 total posts
Name:
Beth
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Re: Interest Only Mortgages
Unfortunately I know people with I/O's that only have them bc they can't afford to pay any principal, and figured that their house would appreciate in the near future so they can buy another house with the equity.
those are the people the o/p was asking about
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| Posted 11/29/06 4:34 PM |
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lululu
LIF Adult
Member since 7/05 9511 total posts
Name:
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Re: Interest Only Mortgages
Posted by SweetestOfPeas
I still can't believe lenders were allowed to offer these "creative loans"
it is NOT in your best interest to not pay down the principal! ESPECIALLY in this market!
Actually i think that it's great that lenders offer these types of loans, because for some people (like my huband and I) they are really beneficial. They should just be a little bit more careful who they approve for these types of loans.
Even in this market, depending on the rate you have, it may still be in your best interest to invest the money elsewhere rather than pay down principal. What would not be in your best interest is to take a loan that you realistically might not be able to afford in 5 or 10 years from now.
We have paid down a good portion (more than half) of our loan, but going forward we are planning to conservatively invest our money rather than paydown prinicpal, until our rate resets at the 5 yr. mark. Financially, this makes more sense for us.
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| Posted 11/29/06 4:37 PM |
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