Mortgage - fixed versus interest only
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Mortgage - fixed versus interest only Slain 04-10-2007
Posted by Slain on April 10, 2007, 3:24 pm
I just refinanced my home to a interest only for 5 years. Because of
the low real estate value these days, my house appraisal was almost a
100,000 less than what I expected.

As a result, I am wondering if I should just get back to a fixed 30
year term.
Here are the numbers

My princpal amount is about 203,000.
I got a 5 year term interest rate of 6.125% - $1050.00 a month.
I can get a fixed rate mortgage of 6.375% - 1350/ month


My logic: If housing prices are going to stay low for awhile, I can
keep the house with a fixed cost. So even if I were to eventually
maintain the house as a rental property and wait until house values
increase, I will not be forced to sell because the cost is still
manageable.

At some point I do plan to sell the house and move on.

Sugestions welcome.
Thanks


Posted by Don on April 10, 2007, 4:49 pm

>> My logic: If housing prices are going to stay low for awhile, I can
> keep the house with a fixed cost. So even if I were to eventually
> maintain the house as a rental property and wait until house values
> increase, I will not be forced to sell because the cost is still
> manageable.

I have taken out several interest-only mortgages and lines of credit and
found that they worked well. If cash flow is an issue, they can
significantly increase your monthly cash flow. This can be good if
maintenance expenses are high and you intend to keep the property for a
relatively short period and then sell. During the early years of a fixed
term mortgage, there is not very much increase in equity over the short
term, since most of the monthly payments go for interest anyway. But
interest rates change. Interest only loans definitely are not a good idea if
you intend to live in the house yourself for 30 years.


Posted by Lon on April 10, 2007, 5:11 pm
> I just refinanced my home to a interest only for 5 years. Because of
> the low real estate value these days, my house appraisal was almost a
> 100,000 less than what I expected.
>
> As a result, I am wondering if I should just get back to a fixed 30
> year term.
> Here are the numbers
>
> My princpal amount is about 203,000.
> I got a 5 year term interest rate of 6.125% - $1050.00 a month.
> I can get a fixed rate mortgage of 6.375% - 1350/ month
>
> My logic: If housing prices are going to stay low for awhile, I can
> keep the house with a fixed cost. So even if I were to eventually
> maintain the house as a rental property and wait until house values
> increase, I will not be forced to sell because the cost is still
> manageable.
>
> At some point I do plan to sell the house and move on.
>
> Sugestions welcome.
> Thanks

Go with a fixed rate. The interest only is like wetting the bed, at
some point you will have to get up and change the sheets.


Posted by joetaxpayer on April 10, 2007, 8:50 pm


Slain wrote:

> My princpal amount is about 203,000.
> I got a 5 year term interest rate of 6.125% - $1050.00 a month.
> I can get a fixed rate mortgage of 6.375% - 1350/ month
> At some point I do plan to sell the house and move on.

First, you realize, you are not saving $300/mo. You know this I hope.
You are saving $507.50/yr in interest based on the rate difference.

Now I have a few questions for you:
Can you not afford the extra $300/mo?
Will something change in the next 5 years that you will either likely
move or will have a higher income?
What happens to your mortgage in 5 years? Does it turn into a 25 yr
fixed? What is the maximum rate it can be? Can you afford that?

Knowing nothing else about you, I can only tell you this; we frequently
revert to the 'how would you feel' questions here. Personally, I'd feel
more comfortable with the fixed, fully amortizing mortgage. At some high
rate, in a positive yield curve environment, I might consider a
variable, but not here, for most of my adult life, that 6-3/8 looks like
a sweet rate. Choose wisely.
JOE


Posted by Slain on April 11, 2007, 10:43 am
> Slain wrote:
> > My princpal amount is about 203,000.
> > I got a 5 year term interest rate of 6.125% - $1050.00 a month.
> > I can get a fixed rate mortgage of 6.375% - 1350/ month
> > At some point I do plan to sell the house and move on.
>
> First, you realize, you are not saving $300/mo. You know this I hope.
> You are saving $507.50/yr in interest based on the rate difference.
>
> Now I have a few questions for you:
> Can you not afford the extra $300/mo?
> Will something change in the next 5 years that you will either likely
> move or will have a higher income?
> What happens to your mortgage in 5 years? Does it turn into a 25 yr
> fixed? What is the maximum rate it can be? Can you afford that?
>
> Knowing nothing else about you, I can only tell you this; we frequently
> revert to the 'how would you feel' questions here. Personally, I'd feel
> more comfortable with the fixed, fully amortizing mortgage. At some high
> rate, in a positive yield curve environment, I might consider a
> variable, but not here, for most of my adult life, that 6-3/8 looks like
> a sweet rate. Choose wisely.
> JOE

Thanks Joe,
Here are all the answers.
I can afford the extra $300.00 but wanted to increase my cash flow.
I was planning to move in 3-4 years and might sell the house in that
case.
After 5 years, based on the rate then I have to take up a fixed rate.
So worrying that at that time if the fixed rate is too high, I might
be in trouble and would be forced to sell the house. If the market is
down then, I might get a really bad deal.

My logic of going with the Fixed is that though interest only sits in
well with my concept of selling in 3-4 years, these are the problems I
see
If the market is down, I would not really be able to sell it.
In that case, if after 5 years I get a high interest, and the real
estate are still down, i would really be under the gun to sell it and
might not get the price I get.

With Fixed, though I will pay more, I am contributing towards the
principal a bit. Also, there would be no pressure on me to sell it
after 5 years.


Could you explain this part to me
"First, you realize, you are not saving $300/mo. You know this I
hope.
You are saving $507.50/yr in interest based on the rate difference. "

Here were some calculations I made. Although, the fixed rate is about
$300.00 higher, I am contributing about $120 towards principal.
So at the end of 5 years, this extra sum is 12*5*300 = $18000

I can take some consolation with the fact that 12*5*120 =$7200.00 is
towards the principal.

But based on your "feel" I think I will stick with the Fixed rate.

Thanks a lot


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