Libor Loans?
Post Fiend
Joined: Feb 2003
Posts: 6,940
Likes: 2
From: Eastern WA
I've never heard of such a thing, but not making any headway on the principle amount on the mortgage on your primary residence is a slow death spiral. On the other hand, if you are in a tough situation such as between jobs, most any mortgage company will, after you talk to them and explain circumstances, be willing to accept interest only payments on the loan for awhile.
Post Fiend
Joined: Apr 2002
Posts: 7,157
Likes: 1
From: Central Kali
Elder User
Joined: Sep 2004
Posts: 538
Likes: 2
From: Florida
Interest-only loans are appropriate for property where you intend on selling it before the balloon is due. If the property is worth $200K and you hold it for 5 years and sell it for $300K, an interst-only mortgage would make sense. If the property depreciates in value then you are SOL.
Senior User
Joined: Dec 2001
Posts: 249
Likes: 0
From: Jacksonville, FL
I'm definitely a proponent of Interest-Only mortgages. I have a rental (that was purchased as a primary home initially) with a 3/1 Treasury I/O loan @ 4.625%. My current primary home is a 5/6 LIBOR I/O @ 5.25%. We knew before going into both of these that we didn't intend to stay there long. We're selling the rental before 2 years of ownership and will prayerfully make about $80K on it, so that $2-3k I would have paid in principal really would have made no difference.
Another benefit to I/O loan programs is that those rates are lower than your typical 30 year fixed rate, sometime a full point lower. It just makes sense for the short term (< 5 years).
Another benefit to I/O loan programs is that those rates are lower than your typical 30 year fixed rate, sometime a full point lower. It just makes sense for the short term (< 5 years).
Fleet Mechanic
Joined: Feb 2004
Posts: 1,448
Likes: 2
From: CA Central Coast
Originally Posted by Rocky J
Interest-only loans are appropriate for property where you intend on selling it before the balloon is due. If the property is worth $200K and you hold it for 5 years and sell it for $300K, an interst-only mortgage would make sense. If the property depreciates in value then you are SOL.
How does the "balloon" occur? I thought that after the interest only time period expired the monthly payment would go up 1) because you're finally paying principal, and 2) the interest rate probably jacks up to whatever it's indexed to.
Am I missing something?
We're toying with IO loan ideas for several reasons, but I'm worried about hidden financial traps.
Logistics Pro
Joined: Oct 2000
Posts: 3,960
Likes: 5
From: All over Texas
My group purchases commercial properties all the time with variable interest rates having a spread, say 150-200 basis points, over the LIBOR rate. LIBOR is an acronym for London InterBank Offered Rate and is generally much more volatile than the US Treasury rates. If you go this route, make sure you get some sort of cap or collar to reduce your exposure to possible skyrocketing rates.
Interest only loans make a lot of sense in commercial real estate where one relies on cash flow for his returns. On a single-family, owner occupied dwelling, there is not nearly a much benefit unless the rate is significantly lower than the other prevailing rates. The biggest problem with interest only loans is that if the house value does not appreciate, and you haven't been paying down any principal over the years, then you might have negative equity at the time you sell....this is assuming you have a very high initial LTV ratio. If you have a lower leveraged loan, this is a moot point. Also, if you don't plan on being in the house for a long period, an interest only loan might make sense because very little principle reduction occurs on a fully amortizing loan in the first years anyway.
Interest only loans make a lot of sense in commercial real estate where one relies on cash flow for his returns. On a single-family, owner occupied dwelling, there is not nearly a much benefit unless the rate is significantly lower than the other prevailing rates. The biggest problem with interest only loans is that if the house value does not appreciate, and you haven't been paying down any principal over the years, then you might have negative equity at the time you sell....this is assuming you have a very high initial LTV ratio. If you have a lower leveraged loan, this is a moot point. Also, if you don't plan on being in the house for a long period, an interest only loan might make sense because very little principle reduction occurs on a fully amortizing loan in the first years anyway.
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Postmaster
Joined: Jan 2004
Posts: 4,758
Likes: 7
From: colorado
i am a partner of a mortgage company and as stated above it makes sence for investments,on properties that you are going to turn, on cash flow properties or for a short term on your residents if you have some cash flow problems of your own. the way it works is this, lets say you get a 10 year interest only loan. you will only pay interest for the first 10 years, after that the original princeable of the loan and the remaining interest is then amrotised for the remainder of the loan(in this instance 20 years), so at that time your payment will increase considerably, as well as in most cases you will not know what the interest will be on that loan until the interest only portion is up
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Senior User
Joined: Dec 2001
Posts: 249
Likes: 0
From: Jacksonville, FL
Originally Posted by e1p1
How does the "balloon" occur? I thought that after the interest only time period expired the monthly payment would go up 1) because you're finally paying principal, and 2) the interest rate probably jacks up to whatever it's indexed to.
Am I missing something?
We're toying with IO loan ideas for several reasons, but I'm worried about hidden financial traps.
Am I missing something?
We're toying with IO loan ideas for several reasons, but I'm worried about hidden financial traps.
I wouldn't say there are any "hidden financial traps" associated with I/O loans. As long as you understand that your Principal Balance will never go down and at some point your Interest Rate will adjust, then you'll be fine.
Post Fiend
Joined: Aug 2002
Posts: 5,324
Likes: 1
From: Denton,TX
I think they're a good option in many cases. It allows people that already have additional debt to free up some of their monthly income to pay off these additional debts. You can also invest that money somewhere else. Also, you can always pay more than the minimum payment if you wish and still enjoy a lower interest rate. With all these benefits, you need to also be disciplined enough with your finances to not buy too much house and to spend the "extra money" in a way that will make it a worthwhile option.
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