Comments on: What Were You Thinking When You Purchased Your Home?

By: Everyday Finance

Everyday Finance — Mon, 27 Aug 2007 12:39:00 +0000

Hey there, not one to drop URLs too, like clever dude, but I thought it would be instructive for folks to see a full break down of an interest only vs conventional and how the int only can actually be lower risk. Int only is sometimes confused with negative amortization or option ARM. A conventional ARM is not risky at all, especially if you put some money down initially.

With a conventional 30 year mortgage, most of the money you pay during the first few years is interest as confirmed by the amortization schedule, which is standard for all loans. Therefore if someone thinks putting 10% down on a 30 yr fixed vs. 20% down on an ARM is less risky, they’re incorrect. Full numerical analysis and excel model available to those interested. Several other benefits include tax, ROI, etc. Hope your readers enjoy!

Dan

http://everydayfinance.blogspot.com/2007/02/is-interest-only-mortgage-really-that.html

By: Super Saver

Super Saver — Mon, 27 Aug 2007 02:11:00 +0000

Frugal Girl,

It seems the Mortgage Companies (e.g. Countrywide), CEOs (eg. Ford, PIMCO) and now the Media are laying tracks for requesting a government bailout of people who made bad mortgage decisions. As a result, they won't learn from their mistakes, and will likely cause simliar issues in the future :-(

As usual, the cost will likely be shouldered by those that have managed their mortgages (and personal finances) well.

Here via CoPF.

By: One Frugal Girl

One Frugal Girl — Tue, 21 Aug 2007 01:42:00 +0000

Clever Dude -- I checked out your blog but I'm still not convinced. I would like to see a specific breakdown of your mortgage payment. What you would have paid with a fixed, what you are paying with a 5/1 IO, and what you will pay once principal becomes due.

The problem with interest-only mortgages is that you, the home renter, cannot time the market. Also, you may think that you will only live in a house for X number of years, but life has a funny way of spoiling the best laid plans.

When the principal becomes due you will be responsible for paying the mortgage and your payments will increase significantly. At that time you have two options: stay in the home or sell it.

If the market is flat or sinking when you sell, you may very well lose money. Don't forget that you have already shelled out money for closing costs and other mortgage related fees.

On the other hand, if you decide to stay you may quickly realize that you are shelling out a whole lot more money for an interest-only loan than you would have for a 30 year fixed mortgage.

The risk is too great for me. But then again I have a 15 year fixed mortgage.

By: Anonymous

Anonymous — Mon, 20 Aug 2007 20:38:00 +0000

Check out the comments people have posted at the end of the article. Not much sympathy out there.

By: Anonymous

Anonymous — Mon, 20 Aug 2007 14:46:00 +0000

Interest-only or negative amortization loans have a place in the world of financing, but the buyer must take these loans with the full knowledge of what they are doing. Taking an IO simply because it allows you to “buy” the house you think you deserve and couldn’t afford otherwise is a serious risk that seems to have turned into a disaster for this man an many others. It’s all about greed. Greedy lenders, brokers and borrowers that don’t understand or care that these good times will turn bad and the home has to be paid for.

By: Clever Dude

Clever Dude — Mon, 20 Aug 2007 02:28:00 +0000

I don't like dropping links, but this story sounds exactly like my own history. I wrote about it here.

I also have a follow-up post for tomorrow to discuss why we financed 100% :)

But in our case, we can afford our loans, and we're planning for the change in loan/housing 2 years from now. We're not overspending on anything now, and we're going to be out of non-home debt in 2 years.

Thanks for the read!