Interest Only Loans: Are they For Me?
A: ONLY If you are are NOT taking this type of mortgage product so that you can afford the purchase price of the apartment you are about to buy. Read that last senetence again if this applies to you, and then read the post for more detailed opinion.
INTEREST ONLY LOAN: a loan where the principal is paid back at the end of the term and only interest is paid during the term. The payment covers only the interest and the actual loan balance remains unchanged.
There are 3 things that scare me in this world: Diets, Turbulence, & Interest Only Loans!
It amazes me that even after the collapse of the greatest Stock Market Bull Run ever, that people havent learned their lesson about living a financially sound lifestyle. Let me be clear when I say this...
IF YOU PLAN ON BUYING AN APARTMENT, WHEREBY YOU NEED TO TAKE A INTEREST ONLY LOAN PRODUCT TO BE ABLE TO AFFORD THE MONTHLY PAYMENTS, THEN YOU ARE BUYING A HOME THAT YOU CANNOT AFFORD!
Take A Step Back For A Moment.....Think About What You Are Doing....And Then, Lower The Purchase Price Of The Next Apartment You Consider Buying!!
One of the biggest enemies of a fundamentally strong housing market, besides high inventory and rising interest rates, is senseless buyers and speculators. While NYC is somewhat protected from the national housing bubble in terms of speculation (and it does exist; Hi Los Angeles. Hi San Diego. Hi Ft. Lauderdale.), it is not protected from senseless buyers. And we have tons of them!
The formula should remain the same:
PUT ASIDE 1/3 OF YOUR TOTAL INCOME FOR HOUSING COSTS
But I find that many buyers are not heeding this advice. I see buyers out there whose original budget is 500K, buying 600K homes! And they are taking out short-term interest only loans to rationalize the purchase. THIS IS A BAD INVESTMENT! An investment that will be unprotected, should we see a healthy correction or should you lose your job. Yet, it is happening.
According to this NewYorkmetro.com article:
Today, we can graze from a buffet of debt options, including interest-only, adjustable-rate, negative-amortization, “silent seconds,” and home-equity loans. Our American dreams, furthermore, needn’t be stymied by puritanical lenders who insist on our scrounging together a down payment. Today, we can sometimes borrow as much as 125 percent of the value of our houses, and we can buy them with no money down.
...which then leads to:
These loans allow you to borrow more money—and, therefore, spend more on your house—for the same initial monthly payment. The catch is that your initial payment may change at some future date, potentially blowing your financial security to smithereens.
A CNN/MONEY staff writer Les Christie recently wrote:
The use of so much leverage makes real estate markets increasingly risky, because lack of home equity gives people one less asset to fall back on in times of need. If housing prices flatten out or decline, some newer homeowners who have built up little equity, could find themselves "upside down" -- owing more than their houses are worth.
These are facts, folks. Buyers are reaching their limits very quickly, setting the stage for what could be a record period of foreclosures not seen since the real estate bust of the late 80's. Now, I know there were different underlying fundamentals that caused that event, but it would be narrow-minded and outright stupid not to have your radar up to facts and figures related to the latest mortgage product trends. I know I am.
LAST NOTE: I think real estate is a fabulous investment. I think the strategy of building wealth for yourself, rather than for some landlord or management company, is a financial no-brainer. I think that the tax advantages that Uncel Sam offers for real estate investors, is the final icing on a great tasting cake. But I also think you should have a plan, a strategy, and you MUST know your limits. Stick to buying the worst apartment in the best building on the best block, and slowly fix up the place as you live there; a new kitchen here, a new bathroom there, and new strip flooring to top it off. When you sell, you will see how a 500K investment appreciated even in a flatlined housing market.
Comments (1)
Hey dear I mean, they say they'll pay part of your mortgage if you agree to give them a percentage of the money you'll get by selling the house later on. But what if you decide to never sell the house?
Posted by fivefingers kso | August 12, 2010 3:27 AM