I know these mortgages were common back in 2005 when the housing market was booming but curious if anyone is still doing them/offering them anymore?
I was researching mortgage rates and was surprised to see a 7 year arm interest only for 1.8% -- which had to have been wrong or I don't understand what that loan is really all about...? 1.8% for interest only, that's incredibly low! I know these loans don't work for most people and that's what got many people in trouble in the first place.... just curious if others have more info on this subject...
It's basically a mortgage where your rate is adjusted. Since the rate is low at the start, your payments are low, but every time your rate gets adjusted, the mortgage payment also gets adjusted. The reason so many people got into trouble with these is because at the end of the ARM mortgage, when the rate was finalized, they then couldn't pay the larger mortgage. Nor could they do refi because the housing market tanked and most home values were less than the mortgage.
There are probably legitimate reasons to do and ARM but with mortgages still being so low, I would never chance not locking in a rate at the start.
I don't think anyone is doing interest only, but a relative just got a 7 year ARM for under 2%. She's older and her kids are grown and she knows she'll sell within the next five years. Since she'll sell before the 7 years is up, a 7 year ARM is a great deal for her. However, she's in a strong real estate market where it's easy to sell a house like hers and she definitely won't want to hold onto the house any longer than she currently plans to. I don't think it would be worth the risk otherwise.
We didn't do an interest only loan, but we did a 5/1 ARM when we bought in 6/11. For us it made sense because we didn't have a huge DP, but we needed out of our old house (for a variety of reasons) and the neighborhood we wanted to be in was going to be a bit of a stretch (for us, >30% of take home pay) if we did a traditional mortgage. At the time, traditional 30 years were at 4.25-4.5%, we got 3.25% with the max adjustment of 1%/year after 5 years with a max of 8.25%. We were comfortable with that knowing what our financial goals were and realistic expectations with future budget adjustments.
I don't think you'll find an interest only mortgage anymore. The 7/1 arm (or 5/1 arm) is principal & interest. I think they can make sense for SOME people... those who have realistic goals of paying off their house in less than 10 years or that have a cash reserve where they could pay off the mortgage if rates get too high. The problem in 05-07 is that people either did interest only or an arm and when the arm rate came due, they were unable to refi because the value of their home had dropped drastically.
From what I've read, the FED is holding rates flat through 2015 (I believe) so there should not be a crazy fluctuation of rates in that time. If you plan on paying 20-30 years on your mortgage, a fixed rate is the way to go. Lock in now at 3-4% depending on the term.
Thanks for the info ladies -- it must have been a 7/1 arm that I read -- I just assumed it was interest only but wow a 1.8% interest rate is crazy good. If we move back to the US we would only be in our house for 3-4 years so not even sure if we want to buy or just rent.