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Re: Interest Only Home Loans - Different Perspective
Old 08-02-2005, 05:18 PM   #21
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Re: Interest Only Home Loans - Different Perspective

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Originally Posted by maddythebeagle
I dont know, what are the costs vs. renting since neither gain any equity?
Equity is the difference between what you paid (or owe) and the present value.* While renting you will never have any equity.* If you buy with an IOM, you can build equity through the appreciation of the property, even though the loan isn't being paid down.*
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Re: Interest Only Home Loans - Different Perspective
Old 08-02-2005, 05:21 PM   #22
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Re: Interest Only Home Loans - Different Perspective

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Originally Posted by Charles
JG, I agree.

With respect, the proposition by my employee (a very sharp Controller) is that he is paying an interest rate equal to or less than (he believes it is less) a conventional 30 year fixed rate loan.* Whether he is working or not is certainly partly a function of the market and economy.

[Note the Financial Executives Networking Group (the FENG) has something like 20,000 members ... Controllers, VP's Finance, CFO's, etc.* I am told by one of the leaders that roughly 65% are unemployed.* These have been hard times of late for many financial professionals as companies have gone BK, merged, etc.]

He has hedged by having a lower monthly commitment than with a conventional amortizing loan, but he and his wife are currently amortizing the debt over the next 10 years.* This is about intelligently hedging against tougher times.* And, he and his family also have an emergency cash fund, invest when they can, etc. ... these choices are not mutually exclusive.

I think that assuming the bank / note holder will be willing to take interest only payments if / when times get hard is a big risk ... I would much prefer to sign a note that allows for the hedge in the contract.

So while these interest-only loans certainly have concerned me as well, the question is whether they can be an intelligent hedge if used with discipline.* When you consider this question, think about it from the standpoint of people who still need to work, and have the discipline to self-amortize the loan as they are capable.

My real reason for floating this is because I too felt concern when I heard what he had done ... until my wife filled me in on his entire plan.* He may have made a very wise decision here.

Ignore the usual problems with those who cannot plan their future ... please consider how this might actually work to the benefit of the so-called young dreamers.

Thanks.
Actually I am waiting for my own place to be built and I have been thinking of this very thing to finance the home. *I am in IT and while I believe my job to be very stable, I worry that may not be the case for the 15 years I originally planned to take a fixed mortgage for. *In interest only would allow me to pay down more principle in good times and in the event of a layoff, I would not be hit with the roughly 2700/mo mortgage a fixed 15 would be. *As a disciplined saver I have wondered if this might be a feasible option to protect myself against future employment issues.

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Re: Interest Only Home Loans - Different Perspective
Old 08-02-2005, 06:10 PM   #23
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Re: Interest Only Home Loans - Different Perspective

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Originally Posted by maddythebeagle
ok. you buy a house with interest only, dont you have to still put down a 20% down payment?, and risking your own money if the housing market has a downturn (if the house value goes down 20%, you are out). It might take you a few years to get back and you are thinking of interest only a short term housing plan?
It depends.* VA used to be $1 down (I don't know if it still is).* Lots of lenders will make loans with 5% or 10% down.* Yes, you may be risking some money.* Life is full of risk.* Would you rather have a stack of rent receipts?
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Re: Interest Only Home Loans - Different Perspective
Old 08-02-2005, 10:24 PM   #24
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Re: Interest Only Home Loans - Different Perspective

We've decided to do this ... our Controller had a very wise idea.

Same interest rate we're paying currently, and Quicken Loans is the only source I've found for a 30 year fixed, interest-only loan (all others were 3, 5, 7, or 10 year ARM's ... no thanks).* Interest rate is fixed for the entire 30 year period.* At your option, interest only for the first 10 years, then it switches to a 20 year amortization.* We'll probably pay off all of the principal in that 10 year period, but if we can't, the payments will trend down each month we do amortize principal, and if we reach a point where we want to conserve cash, then the required monthly payment will be as lower ... drops about $50 each month for each $10K of amortized principal.* I'll regard the closing costs as an insurance premium ...

We've got significant cash reserves now, equity lines of credit, and decent but not complete retirement savings.* This step could help us reach the social security payment stage (assuming it still exists in 9 years) if times get tough.* And, based on the job market in the last 5 years, hedging seems wise.

Appreciate all of the brainstorming and feedback.

Send a private message to me if you'd like contact info for our contact ... she's done a good, very efficient job.
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