If you had a $100k at 8% interest only your monthly payments would be $666.67
The same loan at 8% interest amortized over a fixed 30 years your monthly payment would be $733.76
So by paying interest only you would only be cutting the payment by $67.09 per month. Not worth it in my opinion. That interest only loan would require you to refinance sometime in the near future which could end up costing you more interest if the rates increase by then. It could also affect your ability to get a new loan if property values were to go down from a bad economy.
With the 30 year fixed you’re protected for as long as you want to carry the loan. You can always refinance it at any time should rates become more favorable. You don’t have to worry about getting refinanced later if property values were to drop. You would be protected to where you can ride out the slump period and wait until values go up again.
The bottom line is that you have more control of the deal when you’re locked in on a fixed rate with no balloon payment due.
If sometyhing happened where your daughter couldn’t get new financing you can always carry her until she can qualify and your not stuck with paying interest only. The difference in the payment is paying down the principle balance on the loan.
Posted by Mike Angarola on July 03, 2001 at 14:51:32:
I am currently looking at a two family home and plan on renting one unit to my daughter. She is getting married in 8 months and she would eventually buy me out of the house. My bank is asking 20% down (no problem) and offered an interest only loan with a balloon payment in 5 years. The income from the second unit will more than cover the loan repay and I plan on putting my daughters rent aside for her to use as the down payment when she buys the house from me. My question is A. does this sound like a good plan and B. are balloon payments like this a good way to go.
Oh yeah, my daughter and her future husband plan on taking over the house in two years, long before the balloon payment is due.
Why would you want to take an interest only loan? With 20% down you should get a 30 year fixed with an excellent rate. This way you’re not backed into a corner with having to refinance in 5 years. You would also have no principle reduction on the loan.
What if rates are way up in 5 years from now? At least with a fixed rate for 30 years you have the OPTION to refi later for a better rate. If rates are high in 5 years you would be locked in at a great rate. What if lending tightened up in 5 years and/or if property values were down from a bad economy? You may have to come up with more money just to qualify for another loan.
I would not mess with an interest only loan, especially if I were putting 20% down!
I agree, with 20% down, if you have even passable credit, you should have lenders lining up to do the deal.
If you told the whole story to your banker he may be trying to be “helpful” by suggesting an interest only loan, but I would go back and insist on a 30 year amortizing loan. Why create headaches that could be avoided later, particularly now when rates are extremely low?
Re: Interest only loan - thanks - Posted by Mike Angarola
Posted by Mike Angarola on July 05, 2001 at 11:42:32:
Nate and Johnboy - Thanks for you comments and advice. The situation I was trying to create was to set aside the rent received from my daughter for maintenance with the majority going towards her downpayment, when she is ready to purchase the home from me. I did express this to my banker and I believe he was trying to come up with a plan that would lower monthly payments while allowing me help my daughter and future son-in-law get started. I meet with him again today and Yes there are some attractive low interest loans available, with as little as 5% down that could work simular magic.