Buying a House with a LOC?

[J-DaWg]

Has anyone ever heard of buying a house with a line of credit? A friend has told me it can be done,. That way monthly you are only required to pay the interest and whatever you pay above the interest goes straight to the principal. You could pay off a house in no time with a plan like that, and if you were having a tight month you could just pay the interest!

Anyone heard of this?

[gar1976]

Originally Posted by J-DaWg

Has anyone ever heard of buying a house with a line of credit? A friend has told me it can be done,. That way monthly you are only required to pay the interest and whatever you pay above the interest goes straight to the principal. You could pay off a house in no time with a plan like that, and if you were having a tight month you could just pay the interest!

Anyone heard of this?

Most banks offer an interest only loan anyways.

Originally Posted by J-DaWg

You could pay off a house in no time with a plan like that,

Not sure how making interest only payments would make the loan get paid down quicker, but OK. Again, most home loans allow you to make extra principal payments if you want with no charge.

Benefits of loan - fixed rate.

Benefits of LOC - possible lower rate, but it will go up eventually at this point in time. Also, banks will probably want to secure the line with the house, or charge you a much higher rate.

[ScottKuma]

You can make extra payments on a fixed-interest loan, too!

I looked long & hard at the "interest only" loans when I bought my house last year. What I found was the following:

a) They are "interest only" for a time, then your payments are actually HIGHER when that time period goes up. This is nice if you expect a nice increase in pay in the fairly near future, because it allows you to buy more house NOW, then pay for it when you can afford it...but watch out! If you don't get that increase in income, you're stuck with the payments at the higher...and possibly unaffordable rate!

b) These loans are generally not fixed-rate, so when the interest rates go up, so do your payments.

c) You end up paying MORE for your home overall when using these loans. This is because of reason b) but even if the interest rate were fixed, the principle on the loan is not decreasing as it would with a conventional mortgage...therefore you pay more interest over the life of the loan.

d) You are not building up equity in the home as fast as you would under a conventional mortgage.

If all you're interested in is your payment for the first few years, and not building credit, then this may be a good idea. If you're going to sell the home within the "interest-free" portion of the loan, you might be better off sticking with a conventional mortgage (helps with down payments on subsequent homes).

[J-DaWg]

OK, say you had a mortgage payment of $2000 per month. If I had it on a line of credit at prime (3.8%) and made the same payment as the mortgage, roughly $500 of that would be interest and $1500 would be paid to the principal every month would I not save money in the long run and pay the house off faster? Considering with a conventional mortgage you are usually only paying the interest for the first 5yrs.

I hope I'm explaining this right

[ScottKuma]

Originally Posted by J-DaWg

OK, say you had a mortgage payment of $2000 per month. If I had it on a line of credit at prime (3.8%) and made the same payment as the mortgage, roughly $500 of that would be interest and $1500 would be paid to the principal every month would I not save money in the long run and pay the house off faster? Considering with a conventional mortgage you are usually only paying the interest for the first 5yrs.

I hope I'm explaining this right

That's fine, IF you have the discipline to pay the extra every month.

Also, on a conventional mortgage, the bulk of what you pay is interest for the first few years, but you DO pay towards principle. I'll use my loan for an example.

I currently pay $1039.28 to my mortgage company. I'm in the 10th month of my loan, and here is the breakdown for last month:

To Principal: $ 161.27 (15%)
To Interest:  $ 801.75 (77%)
To Escrow:    $ 76.26 (for taxes & insurance)

So, while I'm paying more in interest now, I am putting money towards the principle of the loan itself. This increases my net wealth...it's like putting it into a savings account!

[J-DaWg]

thanks Scott .. this is all very helpful

Originally Posted by ScottKuma

That's fine, IF you have the discipline to pay the extra every month.

I would totally be worried about falling into a routine of just paying the interest.

Originally Posted by ScottKuma

So, while I'm paying more in interest now, I am putting money towards the principle of the loan itself. This increases my net wealth...it's like putting it into a savings account!

This all makes more sense to me now. There is so much info out there for first time home buyers its so hard to wade through it all .. Thanks for the help

[spindles]

J-Dawg - sounds like you are not talking an interest only loan. In Australia (and I suppose the US would have the same kind of loan), you can get a loan where your entire pay goes into the loan account, and the account has a visa card/cheque book attached. In essence, your entire pay is going towards lowering the principal - the obvious catch being if you spend too much on the visa/cheque book, you can actually be worse off. This type of loan is great IF you can control your spending. The more you eat into the principal early, the better off you are.