FOUR GREAT REASONS TO CHOOSE AN INTEREST-ONLY LOAN

Somewhere along the way, it’s been burned into our brains.

Interest-only loans are bad.

The endless Chicken Little cries of columnists and talk show hosts have scared a lot of people. If you bought recently, and if you got 100% financing, and if real estate values tumble, and if you have to sell, and if you took an interest-only loan…… you could be in trouble


Could be?

Travelers Haven  
W Cherry St Chicago, IL 60606‎

If all those things happen, you will be in trouble, but it won’t have anything to do with what kind of loan you have. Let’s be different for a moment and talk about four things that interest-only loans do really well.

Pay all the principal you want. Interest-only loans don’t prohibit paying principal. You’d be surprised how many people tell me, “We don’t want one of those; you never pay down principal!” What, the bank won’t take your money? Pay as much principal as you like, when you like. Treat it like a regular loan if you want. The interest-only part is just an option.

Buy a bigger house. Interest-only loans can shave a couple of hundred dollars per month off the payment (at least in Sacramento, your mileage may vary). But because buyers qualify at the lower payment, the doors of home ownership open a little wider. For some, an interest-only loan means having breathing room when things get tight. For others, it means buying a bigger house, buying in a better neighborhood, or getting your kids into the right schools. Think about that. Those happen to be the same qualities that cause homes to hold value better and appreciate more. Stephen Covey says “begin with the end in mind.” I say “buy with the sale in mind.”

Shape the payment. I use interest-only loans to give payments a shape. Look, people’s incomes are rarely flat. Many folks have unpredictable amounts of overtime, bonus, or commission income. Young people have growing incomes. Retiree’s incomes shrink. Single people get married. Marrieds get single. It’s great to give payments a shape that looks a little more like their life.

Save money. Did you ever wonder what happens when you make a large principal payment on a traditional loan? Nothing. At least for a long time. Payments don’t change, interest costs don’t drop. You have to refinance to make that happen. And that cost more money. Sure, if you keep the loan long enough, you’ll skip a few payments and save some interest 25 years down the road. But will you even be in the house then? On the other hand, interest-only loans respond immediately to a principal paydown. Your payments drop next month, your interest costs are lower, and you didn’t have to refinance to do it!

I hope interest-only loans look less scary now. I’ve got more to say on this topic later, so keep your ear to the rail. While they’re not for everybody, they might be the right tool for your needs. As one client recently observed, “traditional loans are almost interest-only the first few years anyway, aren?t they?” Maybe that should be reason number 5.

Got questions; need advice or help with your loan? Call or email me. It’s what I do.

INVESTOR RATES SKYROCKET

I was quoting rates to an investor client today and had a chance to examine the effects of the new Loan Level Pricing Adjustments announced by Fannie Mae last week.   The client is putting 25% down and has a mid Fico score of 6.72.

The “adjustments” to the published rates included 1.75% for investment property and a 2.0% adjustment for her Fico score.  Now ordinarily, lifting the interest rate will eliminate one point in fee for each quarter point we elevate the rate.   Thus, raising today’s 5.25% 30 year rate to 5.5% would reduce the 3.75 total adjustment to 2.75 points, and so on.

Unfortunately, with the way banks are pricing loans today, that formula is obsolete.  There is a one to one ratio between interest rate and points at the moment, and so this loan will require that the investor pay several points at least for a rate in the 6-7% range.