Anyone regret choosing Interest Only Mortgage?
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Anyone regret choosing Interest Only Mortgage?
My offers was just accepted and now comes the loan...my lender is offering some great rates, after reading the Mortgage Relationship thread...but I’m unsure of whether to lock in a longer term loan or go with a 10 yr Interest Only. The idea of paying such a small amount towards interest only really has me interested. Could throw all that extra money each month into my portfolio.
But I keep thinking this could be my forever home. I would hate for 10 years to pass and then rates are 5-6% and I’m kicking myself for not locking in a 30.
Has anyone gone thru this?
But I keep thinking this could be my forever home. I would hate for 10 years to pass and then rates are 5-6% and I’m kicking myself for not locking in a 30.
Has anyone gone thru this?
Re: Anyone regret choosing Interest Only Mortgage?
I am generally risk averse, so my instinct is to go for the 30 year naturally. But I don’t necessarily see a huge benefit to the interest only loan, unless there are cash flow issues you think will change in the next few years.
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Re: Anyone regret choosing Interest Only Mortgage?
I did one for a few years when I relocated for a job and there weren’t any rentals that I wanted.
I think of it as equivalent to renting and it’s a good idea / best idea unless you think it’s a forever home and you’re working toward paying it off.
Caveat you need to really understand the details of what you’re getting into and have cash on hand to pay it off if something bad happens.
I think of it as equivalent to renting and it’s a good idea / best idea unless you think it’s a forever home and you’re working toward paying it off.
Caveat you need to really understand the details of what you’re getting into and have cash on hand to pay it off if something bad happens.
You can do anything you want in life. The rub is that there are consequences.
Re: Anyone regret choosing Interest Only Mortgage?
I think a home is one of those things that's inherently more than some numbers in a spreadsheet. If your stocks went to 0 tomorrow, it would really stink, but it wouldn't necessarily completely change you as a person, your lifestyle, etc. Losing a house is a different story. It's the kind of thing that can completely change the trajectories of you and your loved ones. Yes, there's an investment component to buying a home as well, but more than anything, a home is a home. I like the idea of going into a home purchase with a plan in place to pay it off. Is this mental accounting? Maybe. There could very well be a strong mathematical case for why an interest-only mortgage that allows you to invest more money elsewhere makes sense. But I would not feel like I was in a home if I knew that 10 years from now, I would be subject to unknown rates or have to look for a refinance loan that might not exist or be available to me at that time. What happens if you have a job loss at that critical junction? Are you able to absorb a large surprise rate increase? Will your credit be good enough to shop around for alternatives? Personally, I'd prefer the peace of mind of a traditional 30-year mortgage. It's pretty affordable, yet puts you on a secure path to eventually paying off the home and being able to keep it for as long as you want and are able to make the fixed payments. When it comes to a long-term home, I'd rather not worry about the winds of change. I would only play this games if I knew I was moving in 5 years or something like that.
- simplesimon
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Re: Anyone regret choosing Interest Only Mortgage?
Anybody who's been a borrower over the last 10 years will not tell you they regret an IO mortgage as rates have only gone down.
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Re: Anyone regret choosing Interest Only Mortgage?
It is a roll of the dice.
Hundreds of thousands of people regretted it in the Great Recession when rates reset higher, they lost their jobs, they could not sell the house and their portfolios took a hit. The government bailed a lot of them out though.
There were probably hundreds of thousands who didn’t have all those things happen to them and did okay.
Hundreds of thousands of people regretted it in the Great Recession when rates reset higher, they lost their jobs, they could not sell the house and their portfolios took a hit. The government bailed a lot of them out though.
There were probably hundreds of thousands who didn’t have all those things happen to them and did okay.
- unclescrooge
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Re: Anyone regret choosing Interest Only Mortgage?
Never had an IO mortgage, I but I regret getting a 30 year fixed mortgage. I was unnecessarily paying a premium for a fixed rate when I wasn't going to live there 30 years.
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Re: Anyone regret choosing Interest Only Mortgage?
Where can one go to view rates on interest only mortgages?
Re: Anyone regret choosing Interest Only Mortgage?
simplesimon wrote: ↑Thu May 06, 2021 8:25 am Anybody who's been a borrower over the last 10 years will not tell you they regret an IO mortgage as rates have only gone down.
Exactly. It’s been the good move for a while now. Whether it will be in the future, who knows?
Re: Anyone regret choosing Interest Only Mortgage?
lazynovice,lazynovice wrote: ↑Thu May 06, 2021 8:31 am It is a roll of the dice.
Hundreds of thousands of people regretted it in the Great Recession when rates reset higher, they lost their jobs, they could not sell the house and their portfolios took a hit. The government bailed a lot of them out though.
There were probably hundreds of thousands who didn’t have all those things happen to them and did okay.
I do not understand your post. OP is probably taking a non-recourse loan. In this case, he would just walk away from the house and lose nothing.
KlangFool
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Re: Anyone regret choosing Interest Only Mortgage?
Except his home and his credit but sure...KlangFool wrote: ↑Thu May 06, 2021 8:43 amlazynovice,lazynovice wrote: ↑Thu May 06, 2021 8:31 am It is a roll of the dice.
Hundreds of thousands of people regretted it in the Great Recession when rates reset higher, they lost their jobs, they could not sell the house and their portfolios took a hit. The government bailed a lot of them out though.
There were probably hundreds of thousands who didn’t have all those things happen to them and did okay.
I do not understand your post. OP is probably taking a non-recourse loan. In this case, he would just walk away from the house and lose nothing.
KlangFool
Re: Anyone regret choosing Interest Only Mortgage?
Lucky2Invest,Lucky2Invest wrote: ↑Thu May 06, 2021 12:47 am My offers was just accepted and now comes the loan...my lender is offering some great rates, after reading the Mortgage Relationship thread...but I’m unsure of whether to lock in a longer term loan or go with a 10 yr Interest Only. The idea of paying such a small amount towards interest only really has me interested. Could throw all that extra money each month into my portfolio.
But I keep thinking this could be my forever home. I would hate for 10 years to pass and then rates are 5-6% and I’m kicking myself for not locking in a 30.
Has anyone gone thru this?
I do not understand why you won't take a 30 years loan. What do you have to lose? You are "renting" the house at a very good rate. You could always pay the mortgage off when you have the money. If not, you just keep "renting".
You take additional RISK by taking the 10 years loan for no reason. You could refinance the 30 years loan if the rate goes down. If the rate goes up, you are locked in with the 30 years loan rate.
KlangFool
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Re: Anyone regret choosing Interest Only Mortgage?
This scenario is essentially borrowing money to invest. I would never do that. DR
Re: Anyone regret choosing Interest Only Mortgage?
As others have pointed out, it's a risk/reward question. My first home purchase was an IO, 5/1 ARM and it worked great for me. But at the time, I had a fair amount of higher interest debt, and I bought the home because I had 2 friends committed to live with me and pay me rent (worked great for everyone as we were already living together in an apartment, and buy owning I got us into a place that was twice the size and charged them lower rent than they were paying). I used the money I saved with IO to pay off the higher interest debt pretty quickly, so it worked out well. I would ONLY recommend the interest only loan if you are disciplined in either paying off higher interest debt OR investing the money. If you're not disciplined, or you're otherwise looking at IO only to make the home affordable, don't do it.
But that was 18 years ago and priorities change - I would not do IO now as I'd like to have a paid off house going into retirement.
But that was 18 years ago and priorities change - I would not do IO now as I'd like to have a paid off house going into retirement.
Re: Anyone regret choosing Interest Only Mortgage?
I've never done one, but if the rate is comparable to the 30 year loan, you could figure out the 30 year payment, subtract the interest only loan payment from what the 30 year payment is, and bank the rest. Conventional wisdom would say you have to keep that in a money market or a CD type investment. I'd probably roll the dice and put it in a 60/40 fund, but that is just me. Making your own 30 year loan in this way would allow you increased flexibility, unless you do stupid things with that flexibility like travel the world and buy sports cars and end up at the end of 10 years with no money and no equity in the house.
Last edited by goblue100 on Thu May 06, 2021 9:00 am, edited 1 time in total.
"Confusion has its cost" - Crosby, Stills and Nash
Re: Anyone regret choosing Interest Only Mortgage?
You know what else is borrowing money to invest? Buying a home with a mortgage.
I'm always amused at how homes turn into sacred cows, how they transcend all other investing principles and anything to the contrary is derided as a "game."
If you have meaningful assets and are going to put the monthly payment savings from the IO mortgage into your portfolio, then I think it makes a lot of sense to borrow at effective rates of <2% and build your investments instead of paying principal to a bank. For somebody who doesn't already have a substantial asset cushion and/or won't invest the monthly payment savings, then sticking with a traditional 30 year mortgage is clearly preferable.
Re: Anyone regret choosing Interest Only Mortgage?
Folks,
Please educate me.
What is the difference between a 10 years Interest-only mortgage and 30 years interest-only mortgage? Is the only difference has to do with the interest rate that you pay? If yes, what is the difference?
KlangFool
Please educate me.
What is the difference between a 10 years Interest-only mortgage and 30 years interest-only mortgage? Is the only difference has to do with the interest rate that you pay? If yes, what is the difference?
KlangFool
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Re: Anyone regret choosing Interest Only Mortgage?
I was making a lot of assumptions in how these loans work in my response. I don't think I was incorrect in those assumptions, but if you think about the small amount of principle paid on a 30 year loan for the first 10 years, I would question how worthwhile it is to do an interest only loan.
https://www.investopedia.com/articles/m ... s-work.asp
"Confusion has its cost" - Crosby, Stills and Nash
Re: Anyone regret choosing Interest Only Mortgage?
goblue100,goblue100 wrote: ↑Thu May 06, 2021 3:45 pmI was making a lot of assumptions in how these loans work in my response. I don't think I was incorrect in those assumptions, but if you think about the small amount of principle paid on a 30 year loan for the first 10 years, I would question how worthwhile it is to do an interest only loan.
https://www.investopedia.com/articles/m ... s-work.asp
I do not understand why do you think that it is not worthwhile. The person is "renting" the house for 10 to 30 years. As long as the mortgage is lowered than renting, the person is "renting" the house and fixed his/her housing expense for a very long time. If it is a non-recourse loan, the person is protected on the down side. And, the person can gain from the upside if the house appreciated.
This is leverage with down side RISK protection. It is a great deal!
KlangFool
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Re: Anyone regret choosing Interest Only Mortgage?
Often interest only loans require 30% downpayment. So even if non-recourse loan, the 30% downpayment provides plenty of protection to the lender.
Re: Anyone regret choosing Interest Only Mortgage?
jack.bauer,jack.bauer wrote: ↑Thu May 06, 2021 4:17 pm Often interest only loans require 30% downpayment. So even if non-recourse loan, the 30% downpayment provides plenty of protection to the lender.
Are you saying that there is no zero down payment and Interest-only mortgage?
KlangFool
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Re: Anyone regret choosing Interest Only Mortgage?
But dont think so (but I am just someone who is going thru a refinancing; not an expert at this). When Iooking, IO only loans typically had higher downpayment requirement than a regular loan for lenders that offered it. I am going with a regular loan.KlangFool wrote: ↑Thu May 06, 2021 4:22 pmjack.bauer,jack.bauer wrote: ↑Thu May 06, 2021 4:17 pm Often interest only loans require 30% downpayment. So even if non-recourse loan, the 30% downpayment provides plenty of protection to the lender.
Are you saying that there is no zero down payment and Interest-only mortgage?
KlangFool
Re: Anyone regret choosing Interest Only Mortgage?
How would a conventional 30-year mortgage have helped this person who lost their job and their home value plummeted? If anything, the higher monthly cash-flow required for a conventional mortgage would have exacerbated, not mitigated, the problems you outline.lazynovice wrote: ↑Thu May 06, 2021 8:31 am Hundreds of thousands of people regretted it in the Great Recession when rates reset higher, they lost their jobs, they could not sell the house and their portfolios took a hit. The government bailed a lot of them out though.
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