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Originally Posted by Hardknock
Are trying to convince me or you? Real numbers aren't hype by the way. Depending what local market you're in, one has the potential to get severly reamed in the ass by these products.
You mean to tell me that a fixed only period of say, 3 years with forewarning that rates will rise when that period is over and it's just a question of how much your payment will rise is not risky? And I don't see what the average car payment has to do with any of this. One doesn't normally live in their car. Sounds like apples and oranges to me. There are people out there who have interest only loans in the neighborhood of 3-4% for their fixed rate periods. I know because they were offered to me when I was shopping two years ago. I turned them down like they were the plague they are. With the rates creeping beyond 6% now, they're looking at doubling the amount of interest that they have to pay which will increase their payment substantially.
That's not risky? Depending on your specific situation, you can risk a lot more than $300.
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Interest only loans are not inherently riskier than any other kind of loan. All the variables are known. The only difference is the level of discipline a person applies when they take one of these loans. In the hands of the right person interest only loans are less risky. If I get a 6% interest only loan, if I am in a 40% tax bracket (Fed and State), the after tax rate is 3.6%. If I put the money saved with the lower payments in tax free, AAA rated, municiple bonds paying 5%, I am going to be 1.6%/year ahead of a principle and interest loan.
But you say - what if the value of the property goes down. If I have a interest only loan and the property declines, none of my money is at risk. I could walk. So if I saved $300/month on an interest only loan over 3 years, I have $10,800 of my money and I go back to renting. If I did a priciple and interest loan and I have to walk, the bank gets the $10,800 and I go back to renting. Which is less risky?
If you have a $300,000 home and it drops 20%, thats $60,000. No matter how you look at it, the $60k is either your money or the banks money. If you have to walk, which is less risky? Walking from your down payment and principle or walking with none of your money in the house?
I agree that most people will not bank the money the save with interest only loans and some don't know all of the variables contaned in thier loans and how they actually work. Those people could get hurt. On the otherhand they could get lucky. No matter how you look at it - its not about how the loan is structured, it all about the indiividual. If you think most of the people getting and giving these loans are stupid, the doom and gloom predictions will come true. I tend to give people more credit.
P.S. - The average car payment was used to illustrate how the average person think nothing about a $400/month car payment on a depreciating asset, which is much riskier than buying a home no matter how you do it. Also would a person give up their car payment before their home? I would. In a crunch, I'll get a beater that burns oil or keep a car that has been paid off. Also think about how much people spend on coffee/lunch/finger nails most people can lower their expenses enough to come up with more money for a mortgage if needed.
P.S.S - In a way I have been convencing myself. This thread has made me actually think about the numbers in a different way - Thanks for your help. I going to see if I can get a few interest only loans lined up for the bubble to burst.
