Posted: 3/3/2007 8:43:02 PM EDT
|
I have signed a contract and what not and am buying my first house. The contractor should have it build in about 2 months. My question is: Should I use my savings and put 5% down on the house ~$8500 or get a %100 mortgage. I have zero debt, truck is paid off no credit card debt no school loans..... So what would better put %5 down and after closing only have about 3k left in my saving/money market or do 0 down and keep the 13k less closing costs in the market? I plan on having the 3 lenders I'm working with rerun my quotes with %100 loans next week to compare the monthly payments. I want to explore all options in the next 30 days before I have to start locking rates and mortgage stuff. What do you money exports think? Thanks AR fan |
| Realize though that after 10 years you still havn't touched the principle and your monthly payment after 120 months is most likely going up. Granted there are situations where a interest only loan works...such as a wealthy home buyer who can have his money invested elsewhere until the term comes due. Check the amortization schedule. |
Within the first ten years of a 30-yr-mortgage, paying down the principle is irrelevant. What is relevant is the amount of equity one builds up, having paid $0 for PMI, and being able to deduct one's entire house payment. How much return on investment do you think you're getting from a down payment and/or PMI payments? Most folks getting new houses move within 8 years or so. Interest-only loans are perfect for that. If you decide to stay in your home after the interest-only mortgage term expires, then, of course, you would have to refinance...perhaps with another interest-only loan, as your equity continued to build from appreciation, and you're having had the use of the money that you would have paid in PMI and down payment. |
Run an amortization calculator. On a $100K loan balance, 30 year term, 6% rate, your remaining loan balance would be $83,500 or so after ten years. After only 8 years the balance remaining would be around $87,600. Not a huge amount of the note paid off in the beginning, but certainly enough to pay brokerage and moving costs if you ended up moving out of the place after a few years. This ignores any rise in real estate value, which is also not guaranteed. Also, remember that PMI is tax deductible starting this year. Definitely an important detail to remember in comparing PMI vs an interest only loan. Interest rates do not stay constant. When I was a baby, Mom said the house and car notes were around 10-11% (early 80's), and they considered themselves lucky to have them that low. Do you really think those times will never return? Are you certain your credit will be good enough if you need to refinance down the line? Reducing the chances of having to bring money to the closing table can be a very good thing. If going interest only frees up quite a bit of cash flow, you may want to run the numbers on paying what you would have saved off a fixed rate toward the principal. You may come out ahead IF you are a disciplined saver. Interest only rarely makes sense for Joe Sixpack Homeowner. Unless your income is highly variable (significant chunk coming from commissions/bonuses) and you can trust yourself to make payments toward principal...you're probably better off on a mortgage where you're paying off a little bit of it every month. Even an ARM is better than I/0 if you need to shave interest charges a little. You're still building equity, however slowly. |
I guess, since we're using $100,000 as a loan balance, we're talking about mobile homes. My mistake!  However, even with the example given, I still think you're better off having the use of any moneys that you would have paid as a down payment and in PMI payments. Making payments towards the principle is, as I said before, irrelevant, unless one thinks that one is going to stay in that first house for a very long time. I'm not saying that the interest-only mortgage IS for everybody. What I'm saying is that there are a lot of folks in 30-yr-mortgages who'd be better served with interest-only mortgages. Would simply suggest that one look at all options. |
The numbers and the rate of payoff remain the same. Just adjust scale as needed. ;) Plot it on a graphing calculator and the curve will look the same for a $500K mortgage vs. $100K. Bigger numbers, same concept. Here in the rustbelt Midwest, it is quite possible to get a decent starter home for $100K in a nice neighborhood. The six figure jobs are harder to come by, but when you don't need nearly as much to live a nice lifestyle, why pay the higher taxes on higher salary? ;P The wisdom of the action depends on how much cheaper that I/O loan really is. Regardless, I think it's plain foolish to count on appreciation to bail you out of a tough spot. I personally would not be buying a home without putting at least 3-5% down. That way, if I had to sell in a couple years for whatever reason...IF home sales are flat, or with only modest appreciation, I'd be able to get out of the deal without having to throw *extra* cash at the real estate broker for commission. Loads of marginal buyers have ARMs resetting or are reaching the point where they now have to start paying principal on that interest only loan...and they're sweating. If you have to shave dollars that closely on your monthly payment, you probably can't really afford the house! If cutting that corner saves you a nice chunk of monthly cashflow, it could end up costing you that much worse if rates rise. I used to work in a real estate office- I saw interest only loans work for the developers and the house-flippers, or for families that had significant assets invested other places, with a better return- that they could later throw toward the mortgage if paying down the mortgage was a better deal. It didn't work so well, so often for first time home buyers. For those willing to take on more risk, fine. But don't go whining if interest rates creep up, your raise/promotion never materializes, or the 10%/year appreciation ceases. |
|
Quoted: Within the first ten years of a 30-yr-mortgage, paying down the principle is irrelevant. ***as your equity continued to build from appreciation,quote] Appreciation?? I'd rather build my equity w/ my own dollars that I am having to pay to the mortgage company anyways.... If the market rises, great.. i'll take that too. Hazelstone said it pretty well regarding the i/o loans. My bro-n-law has a i/o 5 yr term loan and I am just hoping his "friend" who sold him it is thinking about his best interests. But he is a sucessful commodities trader so I don't think it's an issue. I think you should look at your mortgage as an investment. (equity) The more principle you can pay sooner the better rate of return you are getting on your house. I'd rather pay 8% for 23 years than 6% for 30. Countrywide has 2200 loans in forclosure as we speak in las vegas.... that's 2200 families losing their house. I've got some copy's of their loans sitting on my desk that will make you sick.  |
Good points, but I don't know how you can look at a mortgage or any other debt as an "investment." I haven't suggested that anybody consider a 5-yr. loan. Have observed that a 10-year loan seems to be working for my son. I agree that interest-only loans shouldn't be used for marginal borrowers, who are just trying to shave a few bucks off their house payments. If you're located in an area where real estate appreciation is so bad that you've got to depend on your paying down your loan principle for your equity, then you're in a pretty sorry mess. |
|
I just picked up a property formerly held with an interest only mortgage. It was foreclosed by the bank who is busily pursuing the former owners other assets. I got a decent price as banks hate REO. I put 20% down and should have it cleaned up and rented within 2 weeks. While an I/O loan might be worthwhile in an always rising market, almost every market eventually has either drops in appreciation or just pauses. If you need to sell or refinance during these times you will be opening your wallet. With mortgages still at very low rates comared to even 10 years ago, gambling with a personal residence is just not required. |
|
Brickeyee... How do you go about finding/buying forclosed homes? I guess what I am trying to ask is... do you find out how much is left on the note and offer the bank somewhere near that? One out of 92 homes were forclosed in 2006, which means there are alot of homes around here that could quite possibly be good deals. We get a list of them from a bank my aunt works at. You might PM me. Dont want to hijack this thread. 
|
|
OP ???? I don't really have an opinion on your financing options...but as someone who has built a house and an addition to that house, allow me to tell you that it will NEVER be COMPLETE in 2 months. That said, be sure WHATEVER financing you secure is secured for longer than 2 months. We locked our rate for 120 days and STILL got screwed because the builder was late. |
|
"How do you go about finding/buying forclosed homes? " You get an RE agent that is very well connected and knows what is going on. And just to make it clear, this was an I/O loan that ran its course over the past ten years. Regretfully sales are very slow and appraised values are down. |
They have been working on the house for a couple months. I'm still a month or two out before I need to lock. I haven't considered the I/O option yet because my thinking is any debt I have I would want to put any extra money I have toward paying off the loan to reduce my total overall intrest paid. (I'll read up on them though and take a look) So far the lenders I've talked with would do either a 80/20 or 85/15 so I wouldn't get hit with the PMI. I understand the 5% isn't going to make a big difference on the monthly but in the long run the $8000 times 6% times 30 years??? I'll keep researching!!! |
Are you gonna keep spouting this in every thread? Your example is your kid who makes a 7 to 8 figure income.... that aint like the majority here seeking advice - especially a first time home buyer. And no - you dont have to make fun of overy home under 100,000 being a trailer.  Your entire argument is a house of cards, waiting to fall. |
Uhhh... not everyone can afford the prime markets.... nor does everyone want to commute over an hour to get to the "hotter" neighborhoods. Paying off your home over time isnt a "mess". Getting forclosed on because your specualtive gamble didnt pay off, and losing your home? That's a pretty sorry mess. I have a friend who lived in Florida. He did exactly what your prescribed - he got 10 year interest only loans because he didnt plan to stay long, and the market was just rising. Well, the bubble popped right after he bought in, and he lost everything, and is in bankruptcy right now. Had he bought only what he could truly afford, in a typical area that wasnt inflating beyond real value.... he'd still be living there, happily, and stress free. Guess which path he would go back and do over? |
|
Anyone who is going to gamble on the housing market rising forever is a moron. Markets rise and fall. If you are gambling on the market rising while you own the house and earn you equity....then good luck. You might do great. You might also go bankrupt. I invest conservatively. I like to be able to sleep comfortably at night. I don't want to stress about if my house will rise in value. Also, while the area that I am living in is rising in value, it's not rising wildly. As a result, if you bought a house with an IO loan in my area, you would be in trouble. You wouldn't have much equity in your house. And I'm going to build a brand new house in about a year and it will be built for less than $90K. Already have the property. |