[shoes]

We've been looking into refinancing our home to save some $$ Right now we are working with our bank and here's where we're at this far....
-We are refinancing with 2 loans to avoid PMI (we just bought the house a year ago and have very little equity) (80/20, but I don't think the 20 part is still considered a mortgage loan.)

- Our first loan we have at 4.5%!!! (down from 5.875!)Plus our bank has a thing where if payments are automatically drafted from our account, they will match the principle by 10% at the end of each year! Cool!

:

-Our second loan is what I'm confused about... we have narrowed it down to two options and need to decide soon...

Option #1: Take out a interest only loan for 10 years for the amount of $38,640 at 3.25% Our loan officer says this is what he would go for and pay as much extra principle as he could. At the end of 10 years we would either pay what remains or take out another loan.

Option #2: Take out a fixed 15 year loan for 38,640. He said he would have to get back to us tomorrow on the interest rate for that but said it would run much higher.. 7-12%.

Before today I had never heard of an interest only loan. I'm trying to figure out which option would be cheaper per month and cheaper over the life of the loan. I'm soooo confused though because he said the minimum (no extra principle) would be $224 (but strongly encouraged us to pay extra.) In doing my own research online on interest only loans it seems like our loan should be 104.65. And then if we paid $371 would be paid in the 10 year time of the loan. He had told us on the phone that we would need to pay an additional $322 a month, so $546 total, to pay it off in 10 years. He was doing the calculations while on the phone with us so I'm wondering if he did it wrong or I'm just still not understanding how the loan works.
From what I've read, when you pay extra principle on a interest only loan, the interest is recalculated each month and will lower as your principle balance lowers.

Anyway, according to an online mortgage calculator I used, option #2 would cost us $408 at 10% ($352 at 7.5, $374 at 8.5) I would think we would be on the lower end of the interest payments because he said we got the lowest available rates with our other two loans.

Everything I read on the internet seems to be very cautious with interest only loans but mostly because no one pays extra! We would absolutely pay extra. We aren't refinancing because we can't afford our current payments. We just want to save more money over the life of the loan. Give the bank less $$ ya know?

Does anyone know where he got his numbers from for the interest only loan? What do you guys think would be best? You guys are the only ones I know that know what any of this stuff means! lol...
Anyway... if you've read this far, thank you! I would appreciate any advice or info on this!

ETA: I think I figured out how he got the $322 a month extra in principle... 38,640/120 (months)=322. But then he didn't account for the decreasing interest payment? and how did he get 224 as the interest only payment anyway??

 

[Delicateflower]

Do interest only loans decrease as principle decreases? Do you think they might work differently than normal ones?

I found this

Quote:

Payment Responsive to Principal Reduction: On most IO loans, whether fixed or adjustable rate, the monthly mortgage payment will decline in the month following an extra payment. This is the only type of mortgage that has this feature. On a conventional FRM, the payment never changes while on ARMs, the payment doesn't change until the next rate adjustment. Some borrowers find this feature extremely convenient. For example, a home purchaser who must close before his existing house is sold may want to use the proceeds of the sale, when it occurs, to reduce the payment on the new mortgage. On many but not all IOs, a large extra payment reduces the payment in the following month On some IOs, however, the payment doesn't change until the anniversary month, and on others it does not change until the end of the IO period. If you are contemplating an interest-only loan and find immediate payment adjustments in response to extra payments a highly desirable feature, ask about it. See When Will Extra Payments Reduce Monthly Payments?

http://www.mtgprofessor.com/tutorial...erest_only.htm

and this
http://www.mtgprofessor.com/A%20-%20...ly_payment.htm

 

[TiredX2]

I would go with the Interest Only option.

Since you said a 80/20 loan, I assumed a 1st mortgage of $153840. On a 30 year mortgage at 4.5% that is a monthly P&I payment of $780.

If you amortorized a 10 year loan at 3.25% for $38640, the payments would be $378 monthly.

Those payments together are appx $1158. Is that approximately what you are paying for P&I now?

Anyway, if you paid that $380 a month on the 10 year loan (specifying the extra to principle monthly) you could then add that $380 to the 30 year loan after the 10 years. That would have you paying off the house almost 9 years in advance (so in only 21 years from now). If you wanted to pay additional down (during the first 10 years) I would put it towards the 1st mortgage first since it has a higher interest rate.

Are you currently paying PMI? If so, you may be able to increase your principle payments to the 1st mortgage from the beginning.

This sounds like a great deal. Honestly, if you want to share where you are getting it from, I'll look into it myself!

 

[shoes]

Yeah... It seems like a no brianer. But I'm concerned because my numbers don't match his. Not even close. And there are a lot of negative opinions out there on IO loans. OHH..... and one thing I forgot to mention.... the interest only loan is AJUSTABLE RATE...

That's another thing that bothers me.

We're going with Wells Fargo! It's been our bank for 13+ years. Our mortgage is the only thing we didn't have with them. Our long history and having several accounts with them and now switching our mortgage loan has tipped us into their "Premier Member" status.

That's how we are getting the 10% matching on principle on our primary loan among a lot of other really amazing perks! Their rates are at 4.75% right now and if you have a credit score of 720 or better you get an extra .25% off. We've always been extremely happy with WF! Now even more so!

 

[shoes]

I'll either be emailing him or calling him today to ask a billion questions.... I think I just wanted confirmation that an Interest Only loan isn't a completely stupid and irresposible thing to do. You guys are so wise! I trust your opinion way more than my banker's!

 

[Carson]

We got an i/o loan when we first bought our home. The amount of the interest only payment does decrease as you make principal payments.

Yes, it can be risky, but we were committed to paying the principal and had the cash flow earmarked to do so. We put all our extra money into paying it off within a year. The adjustable rate didn't scare us too much as we knew we could weather an increased rate.

That said, ours was only $19k. I would be more cautious with a larger amount and definitely make sure you have the cash flow to a) drive principal down before 10 years is up and b) weather an adjustment in the rate.

 

[Knittin' in the Shade]

I would have said go with the IO loan right up until you said it was adjustable rate. I'd be very, very cautious of an ARM right now, because although the rates are low now, I'm very concerned that they will skyrocket in the next 3-5 years due to inflation.

 

[wifeandmom]

I wouldn't touch an interest only loan with a 10 foot pole.

I wouldn't touch an adjustable rate mortgage with a 10 foot pole.

Combine the two? It should be illegal IMO.

First, an interest only loan is going to offer a very seductive temptation month after month after month. If you pay extra towards the principal, great. But you don't have to. And there's a lot of stuff that could happen over 10 years that might tempt you to not pay the extra principle.

Even if you know for 100% sure that nothing would stop you from making the extra principle payments, it's an adjustable rate. Rates are at historic lows. There's really nowhere for them to go but UP. And UP. And UP.

Figure out what the cap is on the interest rate that it could adjust to. Then figure out what you'd have to pay monthly to get it paid off in 10 years. THAT is really the number you need to be looking at. If you can't afford that number, or if that number is more than the other option with a fixed rate, there's your answer. You have no control whatsoever over what interest rates do in the next 10 years.

I honestly cannot imagine even entertaining the idea of an ARM, much less an ARM that is also I/O.

 

[TiredX2]

Quote:

Originally Posted by shoes Yeah... It seems like a no brianer. But I'm concerned because my numbers don't match his. Not even close. And there are a lot of negative opinions out there on IO loans. OHH..... and one thing I forgot to mention.... the interest only loan is AJUSTABLE RATE... That's another thing that bothers me.

How long is the initial period (that would be at 3.25%). What are the adjustment terms?

Interest only is a bad idea *in general* because you gain no equity in the house. Even if you did that, though, you would still be gaining equity within the 1st mortgage so it is not the same issue as people have blowing up on them right now. I would not be interested in a adjustable mortgage right now though--- rates are too low to bet on them going even lower.

 

[polyhymnia]

Aside from IOs & ARMs being things to be cautious of, I would sit down with your lender and make sure you understand where the numbers are coming from. I would never sign for a loan I didn't understand and could not duplicate the terms on my own.