Anybody out there have an "interest only" mortgage?

[CTyankee]

I am considering it. Here's my deal: I am retired, spouse will be in 5 years. We will be selling our house. But in the meantime we must keep up with maintaining our property, which costs money. Taxes are set to increase dramatically in our city in 07, as are electric rates. We have $120,000 equity in a house worth $270,000 if we sold it today. We have been advised to refinance, taking enough to fix the house up, and reduce our monthly paysments with an interest only loan.

We'll save about $300 a month. We are too far from paying off the current mortgage (which would be my first choice of course). We both want to downsize in 5 years (I would like to do it now).

The interest only loan would be like paying rent, only with the federal tax deduction. And of course, we still get the profit when we sell the house.

I'd love to hear if others have done this and how it worked for you.

[billyskank]

1. Is that like an "endowment mortgage?"

That is what my mum has, where she pays only the interest each month, plus an amount which is invested into a stock fund. The idea is that when the fund matures there is enough to cover the original capital.

Trouble is it was bullshit. They missold these things years ago claiming that the stock market would do much better than it actually did. She, and countless others like her, now have endowments which are set to fall far short of the capital sum originally borrowed.

If it's like that, I would say run like the plague from it. If it's something different then please ignore me.

[CTyankee]

2. No, it's a straight up mortgage.

I think that schemes like the one you describe is why there is such a negative opinion of interest only mortgages. Also, people taking such loans to buy seriously overpriced properties and then going "upside down" and owing more than the house was worth.
That is not the case with our house. Houses in my area have been steadily rising in worth but not crazily so. And my neighborhood remains pretty stable.

[billyskank]

3. So how is the capital sum repayed?

[CTyankee]

5. You repay what you owe on the mortgage out of the money you

get when you sell the property. You still have the equity you have paid in, up to the point where you took out an interest only loan, plus the equity you get from the house's appreciation in value.

[nini]

4. Consider the cost of switching loans though

If you're going to sell in as little as 5 years the costs of getting a new loan may outweigh the savings you'll get.

[CTyankee]

6. Yes, you mean the fees?

I realize taking out a new loan involves incurring costs for closing, etc. It is always a consideration when you re-finance. But I am looking to reduce monthly costs, because I fear ever increasing taxes and the cost to keep up the house. I work part time now and really want not to work at all, but I work to do a bit of travel and to maintain the house, basically. When I get through with travel or get too old to do it I certainly won't want to be slaving away because the house needs a new roof, or to be painted, or replacement windows. That's no life at all at a certain point!

[nini]

7. yes..the costs can easily be 5,000 or higher

that's why you would want to consider that.

BUT in your situation you should do what will get through the next few years with the least stress. :-)

[flvegan]

8. Couple things...

1. You have "been advised" by whom to refinance?

2. "We will be selling our house." When? This seems like a terribly important factor here, and here's why...

3. "...when we sell the house..." should be IF you sell the house for the $270,000 value.

Interest only is a carry loan, used by folks when they know when and for how much they will sell the house (also called a "reverse mortgage" from time to time for folks that won't live long enough to see the final payment).

[CTyankee]

12. I thought about the reverse mortgage but does it carry any tax benefit

The tax advantage is important to me because I have 2 streams of income that are not pretaxed: Social Security and income generated by money I inherited from my mother (altho a great deal of it is in tax free bonds). The mortgage interest federal tax deduction is a very relevant factor here. That was what then drew me to the interest only mortgage.

I realize that you don't know what you will be able to sell your house for tomorrow or next year or in 5 years. I can only know what I know now. This is part of my quandary. I know that if I don't keep up with house maintenance it will surely lose value.

[Gormy Cuss]

9. What is your current term?

I'm going to pose some questions here but don't reply with responses. Use them as tools to help you decide if an interest-only loan is right for you at this time.

Is it a 30, 15, or something else? Do you have a competitive interest rate on that product? If you haven't explored refinancing to a fixed rate with no closing costs, you may want to consider that before looking at an interest only at this point. What are the anticipated closing costs for the interest only loan, and how many months of "saving" $300 will it take before you break even?

It sounds like you have two goals: 1)lower monthly payments and 2)use equity to pay for repairs.
On the latter, if you can tolerate working part time just to pay for the repairs that is probably better than taking out equity now because repairs and most minor to modest renovations do not payback 100% at sale.

On the former, try to achieve it through refinancing only to the level necessary to compensate for the increased costs and perhaps you working less. Is $300/month ideal, generous, or just enough of a temptation to consider the interest-only product?

The other consideration is how much equity you want to have when you downsize in 5 years. If you intend to be able to buy the smaller home free and clear (note I said able to buy, not that you would chose to do so.) If so, you want to do everything possibility to build equity while accomplishing your other goals. The interest only product combined with taking out equity to fix the place means that you are betting on increased value alone to add to the equity. It's a gamble. You should read EVERY article discussing the local and regional market and remember that there is a real risk that appreciation in the next few years will be lower than in recent years.

[hfojvt]

10. I've never tried it

but it sounds like a horrible idea. If you are selling in 5 years, then I would get a 5/1 ARM like I did with my original mortgage. It gives you a lower rate that you have to refinance in 5 years, but if you sell then it should not matter (except that sometimes houses are on the market for a number of years before they sell). The amount of principle you pay on a 30 year amortization will not add much to your payments. Since you are refinancing a smaller amount your payment should go way down anyway. That principle that you pay every month will give you considerable equity plus interest over 5 years. Even $30 a month will grow to about $2500 in five years.

[CTyankee]

11. I am considering an ARM for 5 years but my current rate is 5.5 and

I really don't know if I can get that (I'm going to check). My current mortgage is a 20 year. Since I will be 84 when the 20 years is up, I figure I'm not going to be in this house!

[ComerPerro]

13. in your situation, it could work as long as you budget and follow your plan

people get into trouble with interest-only loans when they use it as a means for buying a house they can't afford, like a young couple that wants to have a $800,000 house