Refinancing

HUSKER 37

HUSKER 37

All-American
Just wondering if any of you have had experience with "Interest Only" loans.

I'm being pressured by my Ex to refinance (or sell) our house to get her name off the loan..I filled out some feeler email and have been inundated by reps from Quicken Loans (LoanDepot.com).

The guy that I was talking with tonight spent some of our time talking College Football (He was also an OLB and played at UCLA for a year)...Not that that matters...

But he was pushing this "Interest Only" loan that would be fixed at 4.125% for the first ten years, then will add principal and interest and follow the prime rate..

(Worst case scenario would be 6.125% in year 11 with a ceiling of 9.125% after year 13).

It's been sorta difficult trying to change the paradigms instilled by my parents (Paid off my first car loan in three months because I hated the idea of owing the bank or anyone money)..Seems like every time we refinance to lower our interest rate, we've started over building equity..Maybe It's better thinking of this as renting from the banks with the additional tax breaks..get the monthly payments to around half what I'm now paying and not worry about equity..The surrounding "cookie cutter tile" houses are still going for ~40k more than what we bought it for a decade ago...'Course, we could've doubled our money if we sold 4 years ago. <_<

 
Depending on how long you plan on staying in your home, a better option might be to consider the 5/5 ARM offered by Pentagon Federal Credit Union. Rates are currently at 4.00% and they pay most lender-related closing costs. At the adjustment period, rates are locked for another five years (versus only one year for a traditional 5/1 ARM). The maximum adjustment is 2%. I believe they are currently using the 5 year CMT + 1% for the adjustment calculation (you would want to verify this because they do change adjustment procedures from time to time). 1% is a very aggressive margin since you typically see that number around 2.75% on an ARM. As a reference point, the current 5 year CMT rate is 2.61% so a loan being adjusted today with PenFed's margin would go to a 3.61% rate. (!) The CMT will likely rise over the next five years but you'd still be protected by the 2% cap.

More info here:

https://www.penfed.org/productsAndRates/mortgages/mortgageCenter.asp

I no longer have a 5/5 with PenFed as I was able to refi at a very aggressive 30 year fixed rate last year and plan to stay in my home for at least the next 15 years, but I still think the 5/5 ARM is a great product. It might be a good fit for your needs.

 
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IF there no prepayment penalty (you can make larger payments than required), and IF you have the discipline to make the larger payments to pay it down in, say, 15 to 20 years, then why not? 4.125% for ten years sounds pretty sweet.

 
I used to do mortgages...interest only is ok in the right situation...but what most lenders don't tell you is that when the interest only period is up, you have only the remainder of the loan period to pay off the mortgage...so in your case, it will only be 20 years. So the payments are re-amortized over the 20 years, resulting in a much higher payment than you might be expecting. Rates are low right now (assuming you have decent credit)...I would opt for a 30 year fixed if you plan on being in the house for a while.

mm0

(P.S. this is just my 2 cents worth...obviously, you may have a reason to do the IO loan...)

 
Personally I would not do either an arm or an interest only option. I had a 5/1 arm when we first bought our current house and had to refinance a few years ago to get a traditional loan so my interest rate wouldn't go up. Interest only loans scare me because you're basically renting your own home from the bank and your money is going nowhere. I'd either sell the house, or refinance it under a traditional 30 year mortgage by yourself depending on your credit situation. JMO

 
BIGREDIOWAN said:
Personally I would not do either an arm or an interest only option. I had a 5/1 arm when we first bought our current house and had to refinance a few years ago to get a traditional loan so my interest rate wouldn't go up. Interest only loans scare me because you're basically renting your own home from the bank and your money is going nowhere. I'd either sell the house, or refinance it under a traditional 30 year mortgage by yourself depending on your credit situation. JMO
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HuskerfaninOkieland said:
Don't do it. Shop around and try to find a traditional mortgage.
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Why? (don't do it)

It sorta feels like I'm just renting as it is..We've refinanced to get lower rates twice and each time we pretty much started over with borrowing the same amount we initially paid for the house...(had to roll the closing costs into the new loan).

The only equity we've gained is due to appreciation.

I don't like the idea of "Interest only" but I'm guessing it's mainly due to old paradigms.

I could very easily put the amount I'd save into a separate account and earmark it for my Son's College or my own retirement.

I'm guessing after the initial ten years are up, I'd be paying off the rest in 20 years at probably an extra hundred or two than my current payments, or...what's to stop me from refinancing again?.

My credit rating is over 800-something, but I don't think I can get much better interest rate than I'm already paying.

 
This is just me personally (and I'm not financial wizard...my wife will be the first to tell you that), but I would get a traditional mortgage and try to do one of two things. First, refinance just the remaining balance and not take the equity in your home. Of course your Ex would have to agree to that as well. Or, secondly, refinance with a traditional then take what money you get from the equity and use it as a huge payment to re-gain some of the equity.

Again, I'm not wizard when it comes to financial advice so these two options may not even be viable. I just know the Interest Only loans are what got a lot of people into financial trouble when the housing market bubble burst.

 
Here in Florida, mortage companies were handing out interest only loans to everyone like candy. The first 3 or 4 years were fine and dandy, but when the actually principle kicked in...people hit the "oh sh#t" button, and realized they couldn't afford their house payments. Now we have a ton of foreclosed homes all over this state. I would stay away from that type of loan! Just my two cents.

 
I really appreciate all the responses..

I'm still on the fence.

It would be so great to be able to start having some money to play (invest) with again.

I feel like I've taken too much time off of planning for retirement.

I'm turning 50 in a couple of days, and in another 6 years, I'll be older than my Dad.

I never really planned to live this long, but just my luck, I might.

I guess one way to look at the whole refi thing that I'm trying to wrap my mind around is making my money more fluid..Not having it tied into this house (which to date, my only real equity has been due to appreciation and really nothing to do with the 30-yr fixed rates we've used so far}.

I'd only see the equity of the house AFTER I sold it, whereas I could get my grubby little paws on an investment fund much easier.

 
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HuskerfaninOkieland said:
A lot depends too on whether you intend on staying in the house forever or if you plan on moving in the future.
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If I had a buyer right now I'd probably sell it and get a place closer to my Son's grade school (which is next to a Jr. high)..

He graduates in 9 yrs and is my last remaining tie to the area.

So..either way, I'll probably sell whithin the next decade.

 
If you go strictly interest only on the loan you run a risk of not having any equity at all when/if you sell in about 10 years. It's hard to say what the market will be like then.

 
HuskerfaninOkieland said:
If you go strictly interest only on the loan you run a risk of not having any equity at all when/if you sell in about 10 years. It's hard to say what the market will be like then.
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True, but at my age, I'm not sure I want the equity tied up in the house.

Based on the current comps, I could probably sell for $40-50k more than we paid for it, and I'm not planning on borrowing any more than I owe on it.

I can't imagine the home values staying this low for more than 4-5 years, but even if they do, I'd have $300-400 a month to put in the bank/Pay directly toward the principal/or invest (probably in something less agressive than I've had in the past just to be safe)..Although Precious metals appears to be the best investment judging by all the pawn shops buying all the gold they can get.

300x12x10=$36,000 if I just stuff it under my mattress.

400x12x10=$48k

 
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