YouTube Video: How to get a bigger house while paying the same monthly mortgage amount (and not feel bad about it)
Posted on Thursday, August 23rd, 2007 at 9:07 am.Learn how to leverage a loan type we really like called the "30 year fixed with 10 years interest only" to get a bigger house while paying the same monthly mortgage amount (and not feel bad about it) .
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August 23rd, 2007 at 10:05 am
As a mortgage lender I think I can speak directly to this. I think this 30/10 “Interest Only” (I/O) loan is a good tool to buy more house, however there are some things to be aware of:
1). Since the loan is an “Interest Only” for the first 10 years, you will have paid no principal down. So at the end of the 10th year, when your loan adjusts for the remaining 20 years, the bank will start to amortize the loan over a 20 year period at that point. That way, at the end of the 30 year period of the mortgage; you will have paid off the whole loan. So, paying no principal the first 10 years creates a lower payment during that period, but will create a higher payment the last 20 years of the loan. Of course most people using this financing vehicle would not plan on being in the house longer than the first 10 years, hence I think I can safely recommend it as a sound loan.
2). Second, many banks are changing their underwriting guidelines in light of the problems in the mortgage industry. Banks are tightening guidelines. As a result, many banks will make you qualify for an I/O loan at the fully amortized payment. So you’d need to be able to qualify at the higher fully amortized payment, which partially defeats the purpose of the loan. If a client of mine could qualify for the higher fully amortized payment, then they’d likely do a traditional Fixed Rate Mortgage anyway. I am not sure where the industry is going with all of their guideline changes. All banks may eventually make I/O loans qualify at the fully amortized payment, but right now there are some banks that will qualify an I/O loan based on the I/O payment. With industry guidelines changing rapidly, a consumer will want to double check with their mortgage broker or bank, to see what the latest guidelines are.
3). The obvious question with an I/O loan is that you are not paying principal down. When the real estate market was booming, paying down principal did not matter, as you increased your equity position with appreciation and not necessarily with paying down the loan. Now, with real estate values normalizing, this will affect some people’s desire to take on an I/O loan. The more conservative consumer may want to take the traditional approach to pay down their debt; while others may be OK with the principal amount of the loan not being paid down.