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lakerz · 07-13-2005, 01:45 PM

I've done a lot of reading/talking to people about the whole property buying thing the past two years. Here's Gillie summed up interest only loans pretty well.

Pros:
Much lower mortgage payment so you can take any extra money and either pay into the principal or invest it or stuff your pillows with it.

Studies show the average US property buyer moves every 7 or so years. People are constantly buying a place, then selling and moving their money to a more costly and most likely larger place. In this scenario, interest only or adjusted rate mortgage makes some sense because with a fixed rate (as trepsie mentioned), the first 7 years the majority of your money is going towards interest anyway with very little cutting into the principal amount. A lot of people who buy a place with a fixed rate loan and then move after 5 years could have saved themselves quite a bit of money if they went with an ARM.

Cons:
While property is always a great investment since it repeatedly is proven to increase in value over extended time, any given 1-5 year stretch could show small to medium declines in value. So, any property you buy you may be stuck with for quite some time unless you're willing to take a loss or just walk away (your credit then goes to hell). Like I said, I've been looking to buy for 2 years, but it's a scary time to buy since property in California has just skyrocketed at a rate *way* over inflation and any other reasonable means of value.

With an interest only loan or ARM, you sign a contract saying the interest rate you pay will be good for X amount of years. After year X, that rate will be adjusted depending on how the prime is moving. Since rates are at rock bottom now, they can only increase so if you decide to keep your property after year X you will either have to go with the revised rate or re-finance the property. And again, if interest rates rise up very high when year X rolls around to the point that you could no longer afford the mortgage, and yet the property value has actually decreased due to inflation, bad economy, market adjustment, etc. you would potentially have to walk away from it.

So, going with a fixed rate gives people peace of mind. Even knowing they will most likely be looking to purchase a bigger house down the road and going with an ARM will save them thousands, it's still worth the security to go with a fixed rate. They know what the mortgage payment will be for the duration of the loan, and they can be confident they can pay if down the road property values have sunk and they are forced to stick it out with the property they bought for another 6 years. People say it won't happen, but I think it is a very real possibility. I won't buy a place that I know I wouldn't be happy with for as long as it takes for it's value to increase.

So are you a gambler? Then go for the interest only or ARM and (hopefully) watch your properties value continue to rise and laugh all the way to the bank with the money you had saved on interest and invested in a nice small-cap stock which then proceeded to quadruple in value over that 5 year period and enabled to park a new Porsche 911 S in your garage.

07-13-2005, 01:45 PM	#8
lakerz Senior Member Join Date: Sep 2003 Location: Los Angeles, CA. USA Posts: 237	I've done a lot of reading/talking to people about the whole property buying thing the past two years. Here's Gillie summed up interest only loans pretty well. Pros: Much lower mortgage payment so you can take any extra money and either pay into the principal or invest it or stuff your pillows with it. Studies show the average US property buyer moves every 7 or so years. People are constantly buying a place, then selling and moving their money to a more costly and most likely larger place. In this scenario, interest only or adjusted rate mortgage makes some sense because with a fixed rate (as trepsie mentioned), the first 7 years the majority of your money is going towards interest anyway with very little cutting into the principal amount. A lot of people who buy a place with a fixed rate loan and then move after 5 years could have saved themselves quite a bit of money if they went with an ARM. Cons: While property is always a great investment since it repeatedly is proven to increase in value over extended time, any given 1-5 year stretch could show small to medium declines in value. So, any property you buy you may be stuck with for quite some time unless you're willing to take a loss or just walk away (your credit then goes to hell). Like I said, I've been looking to buy for 2 years, but it's a scary time to buy since property in California has just skyrocketed at a rate way over inflation and any other reasonable means of value. With an interest only loan or ARM, you sign a contract saying the interest rate you pay will be good for X amount of years. After year X, that rate will be adjusted depending on how the prime is moving. Since rates are at rock bottom now, they can only increase so if you decide to keep your property after year X you will either have to go with the revised rate or re-finance the property. And again, if interest rates rise up very high when year X rolls around to the point that you could no longer afford the mortgage, and yet the property value has actually decreased due to inflation, bad economy, market adjustment, etc. you would potentially have to walk away from it. So, going with a fixed rate gives people peace of mind. Even knowing they will most likely be looking to purchase a bigger house down the road and going with an ARM will save them thousands, it's still worth the security to go with a fixed rate. They know what the mortgage payment will be for the duration of the loan, and they can be confident they can pay if down the road property values have sunk and they are forced to stick it out with the property they bought for another 6 years. People say it won't happen, but I think it is a very real possibility. I won't buy a place that I know I wouldn't be happy with for as long as it takes for it's value to increase. So are you a gambler? Then go for the interest only or ARM and (hopefully) watch your properties value continue to rise and laugh all the way to the bank with the money you had saved on interest and invested in a nice small-cap stock which then proceeded to quadruple in value over that 5 year period and enabled to park a new Porsche 911 S in your garage.