What is the different between interest-only loan and fixed rate loan ? does it make sense to go for interest-only loan for fist 6 years ?

Asked by Rikita Jani, Sunnyvale, CA Mon Oct 18, 2010

I am planning to buy the house for 600K and I liked one property which cost 640k. Thus , if i go with the interest-only loan , I can consider that property because the installment is less and I can save some amount .

I have stable job but I want to be sure that I am not making wrong decision to buy this house.

Thanks

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16
Andrea Wince…, Agent, Milpitas, CA
Mon Oct 18, 2010
In my opinion, if you need an interest only loan to afford the monthly payment, then you are buying a house that you cannot afford. I recommend you buy a less expensive home and get a 30 year fixed rate.
1 vote
Mack McCoy, Agent, Seattle, WA
Sat Oct 23, 2010
You're making the kind of money where you need to have a trustworthy accountant, and because they'll have a more intimate knowledge of your financial situation, they'll be better able to advise YOU.

Fixed rate loans are so fabulous right now, that it's difficult to not want to lock that rate in for thirty years. However . . . there are reasons there are so many different types of loans out there.
0 votes
Ruth and Per…, Agent, Los Gatos, CA
Sat Oct 23, 2010
Hi Rikita

You want to get a fixed rate loan, whe you pay off monthly the Loan balance and the interest.

A regular fixed rate loan allows you to do that.

In an interest only loan your loan balance does not change, as you are only
Paying for the Interest or Cots of Money.

Good luck.
Perrry
Web Reference:  http://www.ruthandperry.com
0 votes
Rudi Hofmann, Mortgage Broker Or Lender, El Segundo, CA
Tue Oct 19, 2010
You will be making the wrong decision if you don't go with a 30F rate. Today a 30F is 4.125% / 4.230% APR.

Happy funding, Rudi
Web Reference:  http://www.umboc.com
0 votes
Debra (Debbi…, Agent, Livingston, NJ
Mon Oct 18, 2010
I am going to be short and to the point - NO ....do NOT take an interest only loan!

Let me repeat that........... do NOT take an interest only loan!
Other agents have already explained the reasons below.

Buy the home you can comfortably afford with a 30 yr. fixed rate mortgage.

Or, you can wait a few months, and maybe that 640,000 home will be down to 600,000, and you can buy it then.

Good luck!

Web Reference: http://www.debbierosesells.com
0 votes
Steven Ornel…, Agent, Fremont, CA
Mon Oct 18, 2010
Hi Rikita,

“What is the different between interest-only loan and fixed rate loan?”
An interest only (IO) loan simply means that for the initial fixed period (3, 5, 7, or 10 years are still available) you simply pay interest. As an example, let’s assume the following scenario”

Purchase Price: $640K
20% Down: $128K
Loan: $512K @ 5.50%
Traditional Payment: ~ $2,907
IO Payment: ($28,160/12) or ~$2,347 ($560 per month less, or $6,720 annually)


“Does it make sense to go for interest-only loan for first 6 years?”

If you are going to be in the property for more than 10 years I would say to go with a standard 30-year loan as this will provide you with great options later (sell or convert property to rental).

If, however, your occupation timeline is 10 years or less considering, in my opinion, an IO loan is a smart move in the current financial and housing environment. But first, a question: What type of consumer are you? Are you able to subscribe to a strategy in order to reap a future benefit? If so, consider the IO loan if you can ASSURE monthly payment savings will be SAVED). Here’s why (using figures from above and assuming a 7-year loan/occupation period):

1) At the end of 7 years with the traditional loan your total paid-in principal would be $57,264 and paid interest would sit at $186,932 - a total outlay of $244,196.

2) At the end of 7 years with the IO loan your total paid-in principal would be $0 and paid interest would sit at $197,148 for a total outlay of $197,148. Additionally, you would have accrued SAVINGS of $47,040 (not including any accrued interest).


Now, a few facts to consider: Every dollar paid in principal has an investment return of 0%. You might gain a dollar of equity by paying in principal; however, your actual return on that equity is completely tied to what the housing market does. As many are now painfully aware these days, equity can certainly be lost. With only a 7-year occupation timeline and the continued uncertainty of the housing market my vote would be for the IO loan.

I certainly believe the housing market will correct itself within the next 10 years; however, if the recovery is late to bloom, under which loan do you believe you will be more financially secure? I know which one I would pick if my timeline were 10 years of less!

Best, Steve
0 votes
Michael Robe…, Agent, San Ramon, CA
Mon Oct 18, 2010
Hi Rikita, Most if not every adviser would recommend a 30 year fixed in this environment.

A similar question.."Should I take a 15year loan at 4.25% or a 3.95% 30 year?"

The 30 year is the best choice based on the amount saved every month. That $100-$200 could be reinvested and make for a wonderful number of future choices.

Everyone would agree rates are going to see a substantial rise in the coming years. Where would a higher rate make sense? I can't imagine one.

Michael
http://LosGatosHomesandRealEstateBlog.com
0 votes
Terri Vellios, Agent, Campbell, CA
Mon Oct 18, 2010
Something to really consider right now is interest rates are at an all time low. You are going to pay something for your loan now. If you go interest only and your rate jumps up you may never have these low rates again, and if you can't afford the new interest and payment you will be in the same situation a lot of uninformed borrowers are in right now. If you decide to refinance in 6 years you are going to pay loan fees again, you may or may not have equity, and you risk changing your loan default from a non-recourse to a re-course loan with potential for deficiency judgment.
Web Reference:  http://www.TerriVellios.com
0 votes
Bill Mccord, Agent, San Jose, CA
Mon Oct 18, 2010
For most people in todays world the 30 year fixed is the best choice. However, there are times when an interest only loan may make more sense. An example would be where there are two buyers, one has enough income to handle the lower payment while the other will graduate within the next couple of year,s at which time the joint income will allow them to make the extra payments which will kick in at the end of the interest only time.
What you are really doing in such a case is using a long term financial planning strategy to manage your cash flow to your personal advantage.
Remember, everyones situation is different and we don't all fit into the same mold. Discuss your unique plans and current needs with a proefssional to be sure you have all the information needed to make an optimal decision. This is a big item. Be willing to invest somer time in orger to get it right.
Good luck,
Bill
0 votes
Ulli Rieckma…, Agent, Los Altos, CA
Mon Oct 18, 2010
Hi Rikita,

I would never recommend an interest only loan to my clients. It is a lot better for you to start paying some principal on your loan to get working on the equity in your home. If you have 6 years interest only, then you will get hit with a much bigger payment after the first 6 years. Why not take advantage of these terrific low interest rate and check with a great mortgage broker who can help you get the best loan. If you need some recommendations please call me.

The other option you have is actually very simple: I usually negotiate the very best price for my clients and always save them a lot of money that way. This is my way of bringing value to the transaction! Again, if you would like to talk to some of my past clients, call me and I will give you their names and contact info.

Regards,

Ulli Rieckmann-Fechner
DRE 01831140
408.679.0333
Web Reference:  http://www.HomesByUlli.com
0 votes
Clark Riel, Agent, Reno, NV
Mon Oct 18, 2010
Does such a loan still exist? If it does don't be fooled by the low payments. You really don't pay that much towards principal in the first 6 years anyway.
0 votes
Rikita Jani, Home Buyer, Sunnyvale, CA
Mon Oct 18, 2010
Thank you all for the quick answers. It really helps.
0 votes
Nina Daruwal…, Agent, Cupertino, CA
Mon Oct 18, 2010
Hi Rikita,
I have never advised clients to buy Interest only. In saying that, this is a question for A Lender/Mortgage Broker. They can do a spreadsheet for you and show you what the pros and cons are....both ways
Please let me know if you would like to sit down and speak with my Lender...
Take care, regards,
Nina Daruwalla.
0 votes
David Allen…, Agent, Sunnyvale, CA
Mon Oct 18, 2010
Helll Rikita

Don't fall for the interest only loan. Payments are lower but nothing goes to pay down the Balance owed. Yes in the first years you are paying very little to the principal but something is better than nothing. Yes your payments will be lower so it might be considered an option that I would not take. Call your lender and ask them for their advise. Or call my pre approval dept. Dan at RPM (408) 483-5417 and he will tell you why you should not fall into this trap. I call it a trap because refinancing out of the interest only loan later will also cost you more money. You will need to consider how much you will save each year and if you can pre pay that amount to the principal. And will you actually do it. Call Dan for a free assessment.
0 votes
Marcy Moyer, Agent, San Ramon, CA
Mon Oct 18, 2010
Rikita,
An interest only loan allows you to make interest only payments for a fixed amount of time. In your case that would be 6 years. At the end of that time period you would have to start making principle payments as well. The problem with these types of loans is that your payment will go up a lot at the end of the interest only period. Even if you have a fixed rate loan and your interest rate is the same, your payment can go up by 25-50% when you are finished with your interest only period. So, if you are going to stay in the home over 6 years this may not be a good option for you unless you know you will have a lot more money to spend on a mortgage at that time.

Marcy Moyer
DRE 01191194
Web Reference:  http://www.marcymoyer.com
0 votes
Francis Roll…, Agent, Los Altos, CA
Mon Oct 18, 2010
Hi Rikita,

an interest only loan is cheaper in the sense that you only pay interest, and you do not pay back any principal with each monthly payment. This is better is you are momentarily cash strapped, and expect 1/values to go up, 2/ your income to go up at some point.
It is not advised in a down market, where the values are going down, and you are not paying back any principal in your loan.
If you go that route for 6 years, you will still owe the same amount of principal in 6 years. Who knows where values will be then, it is a personal choice, based on your personal feel on the question.
I hope this helps,
Francis
0 votes
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