[QUOTE=tritium_pie,Jan 20 2005, 11:31 AM]^ that's a huge gamble however.

 

You all are very funny......before you bash the IO programs maybe you should be little more knowledgable on them first..I 'm not going to sit here a type everything about these, but if any of you wish PM me your mailing address and I will send you a whole package on the advantages and even disadvantages on the IO programs.

regards,
tim

 

Lets face it, you are investing in real estate, your home is real estate. If you freed up say $500 a month to invest in other real estate what would you buy? If you want rental property, you can get a loan for that and not have to touch your mortgage. $500 hundred a month is not going to buy you much real estate.

If you have a mortgage at around 5%, you are only really paying about 3.5% interest after taxes AND building equity. That equity is EARNED money, it is a return on your investment. The after tax earnings on bonds, either after tax or corporate is pretty low right and bonds carry a slightly higher rate of risk than a home mortgage. Stocks can have a big payout, and I trust them over the long haul, but there is still the element of risk, taxes, management, transaction and load fees.

My best advice to my coworker was get rid of the cell phone and the 10 social calls he made a month. That forty a month equals about $60 a month in pretax savings or $720 a year. Done over the next 30 years until he retires could be worth $100k easy. I would find something else to eliminate to increase savings rather than get out of a good thing like a low rate 15 yr.

 

Best point of the whole discussion. This is what 97% of people with IO mortgages do. Or have done and need the IO to pay off credit card and car debt.

 

Tim

I agree...most people still aren't fully knowledgable about IO mortgages. They are simply a creation that best serve more sophisticated home owners that are also savvy investors, not for people who need the lower monthly payments to afford their house.

Used properly and in optimal market conditions, IO mortgages are very powerful financial products that can result in above-average returns on investment.

 

That was so eloquently put And you did hit it on the button.

 

Yup.

That's entirely dependent on the interest rate. Assuming they are both fixed rates and the rates are the same.

Your mortgage payment of $1400 (assuming no escrow/property tax etc) would consist of $1000 interest + $400 principal. Exactly the same as if you were to pay $1400 on your hypothetical interest only loan.

While I do not know much about interest only loans, I'd assume that because of the extra risk the mortgage company has to take, the interest only loan rates would be higher than a comparable "regular" loan.

 

OK, so I don't know anything about IO loans... But I'm assuming they have to be variable rate loans? Otherwise there's a deadline by which you have to pay down your principal? What are the rates like?

 

Not entirely true. While in most instances IO mortage rates are higher than regular rates, sometimes they can be comparable or even lower, depending of type of mortgage (ARM/Fixed/Blended) and prevailing yields in the "secondary market".

In the US, the mortgage company (or loan originator) usually doesn't take on the risk anymore, as most mortgages originated are sold into the secondary market (aka mortgage-backed securities or MBS market). In this case, investors take on the default and prepayment risk, not the original lender. However, the rates are determined by yields in the MBS market and are priced to the public accordingly.

 

IO mortgages can be variable or fixed. Within variables, you can get a fully floating rate loan (e.g. based on LIBOR) or a hybrid fixed-to-floating rate (e.g. 3/1, 5/1 etc).

The interest-only portion of the mortgage is usually only during the first 10-15 years. The mortgage then switches to an amortizing payment schedule (principal kicks in) for the remainder of its life. Remember, now that the principal or amount borrowed needs to be paid back over a shorter period, the payments are going to be larger.

Current rates vary by mortgage company and type of product. However, beware of "teaser" rates for ARMS that seem very low at first then ratchet up quickly after a short while.