I have finally found someone to make me a loan on my house. They want me to do a 5 yr interest only/25 yr ARM loan. The interest is 6.875% for the first 5 yrs.
I am nervous about doing an interest only loan. Would I be better off going with a traditional loan? I have the income to make the payments on either type and I plan on staying in the house for at least 10 yrs.
Any advice from the mortgage guru’s would be greatly appreciated.
Brian
Here’s the problem with the loan you described:
Why get a loan now that guarantees a refinance in 5 years?
Atleast go with a 7 or 10 year fixed period, but I suggest a standard 30 year fixed.
Example of 5/25 Int Only loan where the interest rate stays the same after the interest only period on 100K:
Interest only payments the first 5 years = $562.50
P&I payments for the following 20 yearss = $760.36
In the example the 6.75 is constant for the life of the loan. In your case the 6.75 is variable after the 5 year fixed period. Odds are that the rate is going to be higher than 6.75 in 5 years.
My $0.02
Thanks for your opinion. That is why I asked everyones help. Can I ask them to make the rate fixed after the 5 yrs? The probelm is, there is about a $300 per month difference between the interest only loand and a conventional loan. I can afford either of them, but it would make life a lot easier right now to be spending $300 less.
They should be able to do that with little change in the rate.
If your going to be in the house for at least 10 years, either get a 10 yr fixed, a 20 yr fixed or a 30 yr fixed… It wouldn’t make much sense to get into a 5 yr if you aren’t looking for the 5 yr or the cash flow. Rates are not that bad right now and you can still lock in on a 30 yr less than 6%…
Also, you said can you ask them to make it fixed after 5 years… wait a minute… I’m not sure you understand your current offered term… It is fixed for the first 5 years and adjusts thereafter in the remaining 25 yrs according to your index… probably the LIBOR… Now, you can approach your mortgage after the 5 yrs and refinance but why would you do that as rates are climbing?
I would address your current loan officer or find a professional mortgage broker that knows how to better structure your financial future. As a professional, we can explain your loan scenario in terms you understand. After all, it’s your money. You need to know.
Oh, and listen to Pat too. He’s full of good advice.
Here is the deal we worked out:
5/25 Loan
Interest only for the first 5 yrs (I can pay principal during the 5 yrs)
6.875% Fixed
Converts to a standard Amortized loan for the last 25 yrs at the same fixed rate.
Considering the credit problems I have had, I am tickled pink with this loan!
Brian,
Jason made some very good points…especially that one about listening to me. 
At the very least have your loan officer give you two other options. That way you can make you decesion based on an informed comparison.
Just my $0.02
What is even more common is a 30-year fixed loan with a 10-year interest only (I/O) period, this is commonly sold by lenders who have conforming & Alt-A loan products. A 30-year fixed with a 5-year I/O period sounds to be sub-prime lending, but not always the case.
What is your credit like? Are you showing your income to qualify or just ‘stating’ it?
What are your goals with the home & mortgage in 10-years? Do you want to some principal to be paid off? Are you relying on your home to gain equity? Or do you not even care about all of that and just want a place to live and “break even” when you sell? An I/O loan doesn’t mean you have to make the I/O payment, you are always free to make the normal fully amortized payment… think of an I/O loan as an option to make an I/O payment, not as it’s the suggested payment.
One item to compare is what the rate would be on a fully amortized 30-year fixed rate, versus the current one you’ve been offered and also a 30-year fixed with 10-year I/O. If the rate, fees, & terms are the same on all of them then I’d go with the 30-year fixed with 10-year I/O.