Interest Only Mortgage? Would you/do you have it?

[House4Me]

Would you or do you have an interest only mortgage? Our advisor is telling us the dollar is so cheap to borrow that it doesn't make sense to put more than 20-25% down on a house and the interest only loan has the upside of deduction of the interest on the mortgage on our taxes... We can do 3/5/7/10 year term. I have never refinanced a home before so I know we would be at the mercy of the current rates at the time of refinancing. I cannot imagine rates more than doubling in the next 5 years but I guess anything is possible. We have the cash to put 50% + down on a house so it's not like we wouldn't have a safety bucket sitting nearby if needed.

Thoughts? Advice? 

[Deleted]

I wouldn't if you're planning on living there for awhile--fixed rates are so low right now, I'd lock those in.

[delawarejen]

So, it's like renting in terms of never actually owning your house / having a balloon at some point, but like buying in terms of you having to pay for everything that breaks or goes wrong. Nope. No way on earth would I do this. Interest rates are super low these days for one thing. Also, who knows what your life will look like when the balloon comes due? (Hell, if I had 50% to put down I'd probably scale back and buy something for cash if I could.)

[juliabug]

Oct 21, 2014 14:30:04 GMT -5 flygirl said:

I wouldn't if you're planning on living there for awhile--fixed rates are so low right now, I'd lock those in.

This was my first thought, too.

[pamela]

Just ditto above. Absolutely a horrid idea.

[sometimesrunner]

I would consider an ARM--but definitely not an interest-only mortgage.

[badgergrl]

Was the suggestion to then invest the savings of the monthly mortgage in an account so you can (hopefully)completely pay off your mortgage at the end of the term?

I'm not a fan of the strategy but it at least makes a little sense.

30 year fixed mortgages are hovering around 3.75 right now. The interest rate on a 10 year interest only can't be THAT much lower.

[Susie]

Oct 21, 2014 14:28:29 GMT -5 House4Me said:

Would you or do you have an interest only mortgage? Our advisor is telling us the dollar is so cheap to borrow that it doesn't make sense to put more than 20-25% down on a house and the interest only loan has the upside of deduction of the interest on the mortgage on our taxes... We can do 3/5/7/10 year term. I have never refinanced a home before so I know we would be at the mercy of the current rates at the time of refinancing. I cannot imagine rates more than doubling in the next 5 years but I guess anything is possible. We have the cash to put 50% + down on a house so it's not like we wouldn't have a safety bucket sitting nearby if needed.

Thoughts? Advice? 

1.  No I wouldn't, and no I don't.

2.  You don't have to do an interest only mortgage to deduct your mortgage interest on your income taxes.  Assuming you otherwise qualify for the deduction you can take advantage of it with a traditional fixed rate mortgage.

3.  Which coincidentally is what I have and what I'd recommend.

[msmerymac]

I have no idea why you wouldn't want as much equity as possible in a house. Yes, you *can* invest money in other things, but you have to live somewhere, so you're either renting, or buying real estate. When you go to sell, with an interest-only mortgage, the only equity you'll have is the increased price of the property value (hopefully). In 3, 5, maybe 7 years that probably wouldn't even be enough to cover closing costs and realtor fees.

And if you have enough for 50% of the down payment, what are you going to do with it? If you sit on it in case you need it, you won't be taking advantage of the market. If you invest it, you'll be risking some of the principal if you need it.

[mokes]

I understand not putting more than 20% down since borrowing the money is cheap. I could even possibly get behind an ARM -- lower rate = lower payment and more equity, most loans are refi'd/paid off in 7-10 years anyway. But I don't understand the thinking behind interest-only. Was there another benefit other than the interest deduction (which you would get with any loan)? Are you not planning to stay in the house? Was he/she saying to invest the money you're saving by not making the full payment?

[niq]

Yeah 30 year fixed rates are still crazy low, just not the free money low that they were in 2012-2013.

[hamster]

DO NOT DO IT.

We had one. In 2006. Thus we never made any payments towards principle in a crashing market. It was awful.

[imojoebunny]

I have friends that have one on their very expensive home. It is lovely. They pay about 1/2 what we pay with their interest only loan, and it is bigger than our house and has a rental unit in the back that nets them enough to pay the property taxes.

They are not stupid. They are highly flexible people, who would move to a lesser house if they had to. They built the house themselves (hired a contractor, and purchased the lot). They were all in for about $650k. House is easily worth $900k. They also have multiple properties, so could sell others and pay off theirs in time.

Rates can easily double in 5 years. I have seen them drop in half in that time, so they can double.

It is not something I would do, but as part of a portfolio of assets, it's not always stupid.

[House4Me]

All great advice. I think were the FA is coming from is why pay more for your home when you don't have to and you can take that money and invest it in the market. I was told that historically most people don't even stay in the same loan for more than 5 years before they refinance...b/c the rates have fluctuated so much the last few decades.

Lots to think about. Thanks!

[fryjack2]

Our FA JUST mentioned this as an option last week. We have about 50% equity in our home. He suggested it ( but didn't push for it) for a few reasons-

-We are planning on keeping our home as a rental property, but most likely only for 10ish years.
-rental income would be almost twice our mortgage payment.
-we bought in an area that has not and most likely will not depreciate. It would have to drastically plummet for us to not get what we paid for the place.
-we are looking into moving to a larger home, either here or a pricey suburb. We have a 10% but not 20% DP. It will take years more to save the additional 10% with our current expenses of twins in private preschool and a nanny.
-Our expense will go down if we move to the burbs since we won't be paying private school tuition anymore and we can refinance to a traditional loan again.

We aren't interested in that kind of mortgage, especially since we are locked in at 3.5%, but I can see why it appeals to some people.

[genet313]

i wouldn't do it now, solely b/c rates are so low.  that's not to say i would never do it, but i just don't feel comfortable with the concept generally. 
so for you, if you're thinking of getting a mortgage soon, lock in today's low rate (last month we locked in at 3.875%) and enjoy that over the long term.

[BeagleMama]

No way, find another option.

[kadams767]

Oct 21, 2014 20:11:37 GMT -5 House4Me said:

All great advice. I think were the FA is coming from is why pay more for your home when you don't have to and you can take that money and invest it in the market. I was told that historically most people don't even stay in the same loan for more than 5 years before they refinance...b/c the rates have fluctuated so much the last few decades.

Lots to think about. Thanks!

I don't see most people being on the winning side of the refinance in 5 years game if they buy now. I do not see rates staying this low for another 5 years.