Is anyone here-

[Nephythys]

Conversant and knowledgeable about mortgages?

[Ghoulish Delight]

I am to a point. What's your question?

[Snowflake]

Sorry Nephy, I can't help you here. :( Clueless.

[Nephythys]

Ok-
I have never had a home before so when we got into the first mortgage I did not understand it all-

We have an 80/20
The 80 is an adjustable rate balloon. So not only does the rate increase, but the note comes due in 30 years. That would mean 15 years worth of payments at the end of that term
Ouch.
Refinancing this loan before 24 months carries a 6 month interest penalty.

The 20 is a 30 year fixed- just at a higher rate. Can do a re-fi anytime, no penalty.

We also have a small home improvement loan for the new windows we put in. 7 years, no penalty for pre-payment.

I have been working with someone on a re-fi- I wanted to get money out of it (if possible) to consolidate debt but it looks like a no go- here is what she came back with.

1st $167250
30 year fixed
6.875%
interest only payments $958.00 (for 10 years)
includes the 6 month penalty on the old loan- new loan has no penalty for prepayment

2nd $43000
11%
fixed for 7 years
interest only $394
includes home improvement loan (and works as a line of credit, I can pay it off and re-draw from it)

$1598.00 new payment
$1754.00 old payment

$156 per month savings

I told a friend at work whose husband works (or used to) in the industry and she said an interest only is bad. That I will lose (or not gain) equity in my home and that when the interest only ends I will get bit with a huge change in payments. She said it is good for short term homes, but not for one you will live in for a long time.

I know nothing about them-and I am more baffled now than ever.

Is this going from bad to just slightly less bad- or is it a step in the right direction?

[mousepod]

Hey Neph,

Since Heather and I are planning on jumping into the homeowner pool soon, we picked up this book (http://www.amazon.com/gp/product/0910627703/103-9187849-5247850)
http://ec2.images-amazon.com/images/P/0910627703.01._BO2,204,203,200_PIsitb-dp-500-arrow,TopRight,45,-64_OU01_AA240_SH20_SCLZZZZZZZ_.jpg.

I've learned a lot from it, and recommend it as a way to demystify the double-talk you hear from so many lenders.

Hope this helps.


(Love your posts. Hate your sig line.)

[Nephythys]

Thanks MP. :)

I understand not liking my sig line- I don't like liberal politics and the dems in congress.

I will look for something new-but I'm picky.

[Ghoulish Delight]

Generally, interest-only is not worth it. And at $150/month difference, I'd say definitely not. You will be gaining zero equity, and at the end of the 10 years you will have the same principle to pay, except now you only have 20 years to pay it instead of 30, so you can guess what that does to your payments.

You're probably better off at this point making do until you pass the 24 month penalty period. You'll have saved up some equity and will likely be able to get a better deal.

[Nephythys]

Speaking to the loan lady-

30 year fixed
NOT an Option ARM

I would continue to gain equity- by paying down or home gaining value.

I paid $189k- homes are selling in my area for $223k

At the end of the 10 years (interest only term) my loan would be reamortized over the remaining 20 years. So let's say I never paid anything but interest and reached 10 years- my payment would change to $1284 (only around $300 difference)- but only if I don't re-fi or pay on the principal.

This won't adjust on me-rate locked for 30 years. Equity in the home at 95% financing.

(and quick reply doesn't work :()

If we did principal/interest most of it would go to interest anyway.

[Ghoulish Delight]

And how much will you be paying in fees to refinance now, and refinance again 10 years down the line? That's money you aren't going to see again.

Yes, most of it goes to interest anyway, but do you know how much "most" is? We also have an 80/20 loan, and on the first mortgage, more than 10% of my payment goes towards principle. If yours is anything close to that, you're paying yourself near the $150 difference every month anyway.

So unless you really need to have the money in hand right now, the best long term strategy is to stay the course until you can find something that doesn't involve interest-only.

(and I have no freaking clue why quick reply seems to be getting worse, no one's been able to even suggest possible reasons)

[Nephythys]

I will get no money in hand by doing this.

I am not doing debt consolidation with it.
It is not an ARM- will not adjust.

Thanks for all the input though- I am learning as I go. I do appreciate it.

[BarTopDancer]

You are also counting on the fact that housing prices will continue to rise. You don't want to find yourself upside down at the end of 10 years because your area's market tanked. :(

[Ghoulish Delight]

I will get no money in hand by doing this.
By "money in hand" I meant the $150/month difference in payments.

[Alex]

Assuming you pay only interest on an interest only loan, this is very bad unless you already have a fair amount of equity in your home (which, I'm guessing, you don't). If you have to sell your house any time in the next few years, you'll likely find yourself underwater on it and barely able to get enough out of the sale to pay off the mortgage or not being able to do even that. Yes, if your market continues to appreciate you can come out ahead but there is no guarantee, particularly in the short term, and any emergency need to get out from under the mortage (loss of employement, etc.) will have you selling cheaper than you might have otherwise done.

If you take an interest only loan and are faithful about making additional principal payments, it may work out (having the option in an unexpectedly lean month to pay very little). However, if you're feeling a pinch that the $150 monthly savings is very attractive to you, then you probably aren't in a position to pay much principal each month anyway and you're still in the first boat. Especially if you're using the HELOC on the 2nd to continuously draw out what you're paying in.

You downplay at $300 (almost 30%) jump in payment (just from the 30-year fixed; when and how much will the 2nd be reamortized) after 10 years but keep in mind that you are chasing now a $150 reduction in payment. It could be that in 10 years that will be an insignificant change but it could be that it will be a blow as big as it would be today.

There's a reason interest only is generally a subprime type of lending. Because people with great credit and plenty of money don't want it. If interest only made much sense, then the rich people would be doing it.

If the reason you were initially considering it was debt consolidation and that isn't going to be a result of this refinance I would back off for a little while and give it a lot of thought. And try talk to other experts than just the woman trying to sell you on a loan. And be very honest with yourself about whether you'll faithfully pay principal. Do not include in the benefits column anything you aren't completely certain you do.

[Nephythys]

I am not feeling a pinch- finances are better than ever in fact (paid off my car with the tax refund). I am about to pay off two credit cards that have MONSTER interest rates.

I don't even know what you mean about HELOC and drawing out- I am not going to pull anything- so I am not sure what this means.

My main goal was not debt consolidation- it was getting out of the ARM Balloon loan.

[Ghoulish Delight]

I don't even know what you mean about HELOC and drawing out- I am not going to pull anything- so I am not sure what this means.I think he's referring to your mention that the second loan would be available as a line of credit. It seemed to infer that you might use it as such.

And I guess I'm a little confused as to your goal, since you said initially "I wanted to get money out of it (if possible) to consolidate debt."

So, in the end what Alex and I are saying is, unless you need the extra $150/month as liquid cash or you need to consolidate your debt, you're better off waiting or finding other options than taking an interest-only loan for now. As long as you've got plenty of time before your balloon payment kicks in, you aren't doing yourself any favors by refinancing before the penalty period is over. The goal is to refinance as few times as you can get away with since each time you do it's going to cost you up front.

[Nephythys]

I think he's referring to your mention that the second loan would be available as a line of credit. It seemed to infer that you might use it as such.

Naw- I was just repeating the info from the woman at Chase. I have no plan to use the money.

And I guess I'm a little confused as to your goal, since you said initially "I wanted to get money out of it (if possible) to consolidate debt."

It was a goal- but did not work out that way based on the #'s she gave me. So no, I would not be using this for debt consolidation.

So, in the end what Alex and I are saying is, unless you need the extra $150/month as liquid cash or you need to consolidate your debt, you're better off waiting or finding other options than taking an interest-only loan for now. As long as you've got plenty of time before your balloon payment kicks in, you aren't doing yourself any favors by refinancing before the penalty period is over. The goal is to refinance as few times as you can get away with since each time you do it's going to cost you up front.


I actually sent the lender a document with a lot of the info I have gathered from you guys (and others)-

I have alot of questions now- and obviously need to know more about it before doing anything more.

[Alex]

Ah, since that was the only benefit (other than monthly payment you mentioned) I jumped to a conclusion.

If you aren't hurting for the extra $150 a month and if you don't get any debt consolidation out of it, it sounds like you can relax and take your time and know exactly where you're jumping to.

Sorry, I slipped into work lingo with HELOC. Home Equity Line of Credit.

[Nephythys]

Thanks GD and Alex- really.

I asked alot more questions- I know more about the loan and I also spoke to her about a fixed rate 30 year P/I loan as well. Same as I am paying now- just not IO.

She did point out though- if I can pay that anyway, then do the IO, pay that loan amount and I will be paying more principal than on the regular P/I loan.

Lots to think about but both options are on the table.

[Sub la Goon]

Being in the mortgage industry, I can say that right now there is generally a lot of angst and hand-wringing going on over interest rates, defaults, Sub-Prime risk, housing values, etc.

As a result, it's harder for people to be approved for Fixed Rate loans (unless your Credit Score is outstanding and you don't need money anyway).

Right now would be a good time to sit and wait and see where things go in the next several months. I hope your ARM loan isn't going to re-cast soon (potentially increasing your monthly payment substantially). My hope is that you can wait out the 2 year Prepay Penalty and the market will have calmed down.

In general, my best advice is to pay off as much Principal as you can and build that equity. Kind of a no-brainer, but hey... Also, do whatever you can to boost your credit score(s) to be in the best position to Refi at a good rate when the time is right. This includes things like having 3 credit cards that you USE and PAY OFF every month. Getting rid of them all or just not using them does not help. There are plenty of sources for more Credit Score (FICO) advice.

Good luck and stay the fiscally conservative course!

[Nephythys]

Just an update-

I had the # for another lady who does mortgages working with the realtor I used. She is going to see what she can do for me as well-

What IS mortgage etiquette? Do I tell the Chase lady I am having someone else look at it?

[Nephythys]

This is a message I got-

Between this and the thread you started, you were given some good info on interest only mortgages and some not so good. It's true that if you're paying interest only then you're not paying down the principal, but it doesn't mean you aren't building equity. In other words if your mortgage principal stays the same but your home is going up in value, then you're still gaining equity

As far as your other question, here's a general rule of thumb: If the amount the loan will save you over the course of two (2) years does not equal or exceed the cost of the loan, then it's not worth it. For instance, you state that you're gonna save $156/mo. $156 times 24 months equals $3,744. Now, take the closing costs of the loan you want to obtain (you can get fairly accurate figures off your Good Faith Estimate the lender should provide for you) and add to that the 6 month pre-payment penality. Now you tell me, is it equal to or less than $3,744? If it's more, it's probably not a good deal.

Also, the 6.875%first and 11% second sound high to me. Right now 30 yr fixed are in the 6.0 % to 6.25% range and a second should be in the 8% to 9% range, but I'm not looking at your credit so I don't have all the details I really need.



I am going to put this off till next year. The $156 makes little to no difference right now. I would be spending MORE to save almost nothing.

So thanks again-