Interest Only Mortgage Loans: Cheaper than rent … 5 years or less.?

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What are the advantages / disadvantages are there to take a mortgage interest only if I intend to live in the house a few years, I can not make the payments on the principle, and I sell the house or mortgage after a few years?

  1. Reply
    February 24, 2011 at 4:14 pm

    Cheaper than renting, is one advantage. The only other advantage I can think of is timely payments will help your credit history.
    I can think of several disadvantages. You will have to insure the house, and homeowner’s insurance, which covers the building itself as well as your stuff inside it, is more costly than renter’s insurance, which protects only your stuff.
    You’ll pay property taxes if you buy the house. A landlord obviously has to recover his property taxes from part of his tenants’ rent, but one apartment among many in a building shoulders a smaller percentage of that expense.
    Maintaining the house is more costly than maintaining an apartment, and the final cleanup when you move out will be harder.
    You’ll also lose a lot of money in bank fees, points, commissions, etc. both buying and selling the house.
    And if your plans in a couple of years fall through (job changes, whatever) you may find yourself stuck with zero equity and a much higher mortgage payment, which may require costly refinancing to get out from under.
    If I were you, I’d rent until you know you’ll be in one place for a long time.

  2. Reply
    February 24, 2011 at 4:44 pm

    First of all it is a big gamble. Right now we are in a down swing. You could end up with an outstanding loan for a house that you don’t live in anymore. The lender is the only one that makes out with this type of loan. If you think it is so great why is it the line of credit with the largest foreclosure rate of any loans. They get your money, house and anything else that you might have—stay away from interest only.pp

  3. Reply
    February 24, 2011 at 5:03 pm

    In most parts of the US, you’d be foolish to buy a house right now and think you can make a profit in 2 years.

    Think about this… what if you buy and prices go down for the next 12-18 months? You never know.

    I had a house for 2 years and couldn’t sell it if I tried.

    Think of a house as an investment… it can go up or down in 2 years. If you keep it 5 years or more you should make a profit… but 2 years may not be enough.

    Remember… it has to go up in value 3-6% just to pay the agents to sell the house in 2 years, plus you’ll have closing costs on top of that and all the fees you pay to buy the house…which will be another $ 500-$ 4000 depending on how good you are at negotiations.

    Good luck!

    PS. Wells Fargo Bank has a great 30 year loan, Interest only for the first 15 years.

  4. Reply
    February 24, 2011 at 5:24 pm

    There are a couple of advantages/disadvantages you’ll want to look at here. The first advantage/disadvantage is the equity.

    You will only have an advantage on the equity side if you are certain that the house values will appreciate in the next couple years that you plan to be there. Even if you are certain of this, remember, you still have to sell it. In today’s market, the best priced homes are taking almost 6 months to sell, which means, you’d pretty much have to put it on the market only a year after being there.

    That being stated, the second advantage, and major one, is the tax advantage. You get to write off your interest on your home mortgage payment. You can’t do this if you are renting. Since your payment is 100% interest, you get to write all your payments off at the end of the year. This alone will make it worth buying, even if your home doesn’t appreciate.

    As long as the housing market is relatively stable, you should be fine. What you’ll need to worry about is depreciation in the area. I would check some resources like to make sure the housing market hasn’t drastically fell in you area over the last year or so first, but you should be fine. It’s definately a buyers market out there, so happy hunting:)

  5. Reply
    Quicken Loans
    February 24, 2011 at 5:55 pm

    The big advantage of an interest only mortgage is that you have a choice whether to pay just interest or interest and principal each month. This allows you to control your cash flow and pay what you want. In the situation you describe above, as long as your house is appreciating in value (going up) you are ok. You’ll sell the house for more than you bought it and you’ll be able to pay off your full loan and possibly even make a small profit.

    However, the disadvantage of an interest-only loan is that you aren’t paying any principal off each month if you only make the interest only payment. If you happen to live in a part of the country where property values are dropping, you could find yourself in a situation where you owe more for your home than you can sell it for if you haven’t paid down your loan at all.

    Does this make sense? It’s very rare for property to depreciate in value, but it does happen. If you live in one of the few areas where property values are dropping or not going up, you probably don’t want to go with an interest only loan. It might not be the best solution.

    As opposed to an interest only, I would recommend doing an adjustable rate mortgage (ARM). With an ARM, your rate is very low for the first few years (usually 3, 5, or 7). This way you’ll get a very low rate for the few years you want to live in your home and you’ll sell the house before the adjustable rate goes up. And you can pay off some of the principal, so the risk is less that you will owe money when you sell and you still get a low monthly payment.

    I’ve included a link to a page about adjustable rate mortgages. You can take a look for more info.

    Good luck!

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