interest only mortgage

[houseelf]

I know that I'm getting ahead of myself here, but I'm seeking advice on obtaining an interest only mortgage for our next move during fellowship. Has anyone done this? Does anyone have any advice?

I read the following article which advises that interest only loans may work for individuals who anticipate higher income in coming years:

http://www.bankrate.com/brm/news/mtg/20020620b.asp

What do you think? Also, we currently have a little chunk of equity built up in our townhome. I would *like* to use this money to 1) buy a house and 2) pay montessori tuition for the two years during fellowship. I know that it is a risk to spend hard earned equity, but my whole life is one big financial risk right now.

Since unemployment will probably occur for a significant amount of time for me, the other options are very meager Roth IRA investments and very meager 529 investments which can be used to pay for private school (non-college) tuition. I'm trying to weigh the options of consumer debt vs. IRS tax penalties for early withdrawal. Earlier, we thought we would do a suntrust loan to finance this fellowship period, but 10-14%! Whew-- feels like sodomy to me!

Any other suggestions on how to carefully manage accrued debt? I know that debt is coming. I just want to be as smart as possible about it without deteriorating a good credit record.

Gambling, anyone?

We currently are on a 5 year arm mortgage because we knew that we would be leaving. I highly recommend this alternate financing for the gypsy medical lifestyle. Our financial goal was to make it through residency consumer debt free, but I don't think that we quite achieve it. Holding the line is becoming increasingly difficult.

Advice?

Kelly

[PrincessFiona]

I don't think I'd go for the interest only mortgage, Kelly. You may as well just rent for the 2 years....seriously. Either with a traditional mortgage or w/o, you will only pay interest....and you'll only be living there for 2 years. You probably won't even make up for your closing costs AND you'll have to put your home on the market, show it, and sell it....

We rented a house for our 2 years of fellowship and I never regretted it. It wasn't "home ownership" but we were able to walk away without worrying about putting it on the market and selling it, etc etc.

Why buy and have 'interest only'....I'd just rent...really. It's so much easier for a 2 year drop-in-the bucket...AND the person renting would have to pay for repairs and maintenance...not you.

In general though, I'm biased...I am very much against interest only home loans... so maybe someone here can give a less biased opinion.

[PrincessFiona]

Is SunTrust 10-14% now??? We got in at 8% and we thought that was high!

You may have to just consider using your equity for school and living costs and bite the bullet and rent...that's what I'd do....

[houseelf]

But if we rent, won't we have to pay capital gain tax on the equity that we have withdrawn to pay for our fellowship adventure?

Kelly

I think renting might be a good option, too.

I remember talking to our mortgage broker about an interest only loan but don't remember a lot since we didn't go with it (did a 3/1 ARM that I am a little antsy about and thinking 5/1 would have been smarter. Oh well). If I remember correctly, it wouldn't help us out a whole lot on the monthly payments because we were getting such a good rate on the 3/1 (somewhere in the 4s).

I think that it depends on how much equity you have and the real estate market you live in. Interest only loans are much more popular in the expensive California housing markets. Here's an article I found:

http://www.smartmoney.com/ask/index.cfm?story=20050624

I completely understand your need to start looking at this stuff. I think it will depend quite a bit on the housing market you are going to -- whether to do interest only and whether renting makes more sense.

[PrincessFiona]

No. I don't think so.

http://www.bankrate.com/brm/itax/tax_ad ... 0819a1.asp

the new rules require that you own and live in your home for a period of two years within the five years preceding its sale. If you meet the ownership-and-use test, you don't have to buy a new home and you can exclude up to $250,000 in gain, or $500,000 in the case of a married couple that files a joint return.

I agree with Kris.

I completely disagree. We have interest only as do many of our friends in California. And it's paid off quite significantly. We get to deduct our mortgage interest, a sizeable benefit you don't get renting.
In one year we have made a minimum of $60,000 in equity!
We were paying more to rent a house in our neighborhood than to own one with an interest-only mortgage.
Sure it's a gamble, but I prefer to gamble that money on a real home than throw away money in rent for 2 years. With a family, renting a house will cost more than buying in some places, especially California. Sure our property taxes are high, about 3K a year but I think it's still worth it.
Even people we know here who make 200K/year are doing the interest only because they know they won't be in their homes for more than 5 - 7 years. We might sell in the spring when we have lived in the house for 2 years because we will move to LA for research. But since we have to come BACK to finish residency we will probably rent it out and try to hold on to it. And hope it continues to build equity.

Really, really depends on where you are. California is a TOTALLY abnormal real estate market - $60K appreciation is awesome for you, but unlikely for most of the rest of the country.

For example our house in Cleveland - we paid $115K for it 5.5 years ago and it only appraised at $144K last year (with added a/c and remodeled bathroom). Plus, it's been on the market for 8 months now.

The getting to write off the interest is definitely one big plus you don't get with renting.

I completely disagree. We have interest only as do many of our friends in California. And it's paid off quite significantly. We get to deduct our mortgage interest, a sizeable benefit you don't get renting.

I know...that's why I said there are parts of the country were they are popular (and make more sense) -- like California.

[DCJenn]

We have an interest only mortgage- the DC market being much like CA.

BUT I also pay on the principal each month- i just bump up the payment so that it's an even amount every month.

We aren't going to live anywhere permanently in the forseeable future and paying someone else's mortgage pisses me off.

Jenn

PS- we also took a 2nd mortgage to pay PMI that's also Interest Only and althoug the fees go up each month, it's still less than the interest on the f-ing credit cards.

[houseelf]

RE: PMI--didn't someone say that Bank of America offers a no PMI mortatge. If you are paying PMI try to get rid of it asap.


RE: buying vs. renting. I honestly have to say that buying a house is one of the best things that we have done financially, even without the significant equity gains that we have made. Our monthly payment is cheaper than our rent and the interest write off at tax time comes out to about 2 grand per year. Even if we gained no equity because of appreciation, we'd still come out ahead because of the tax incentives. And in case of the "doomsday scenario" we always have our home to borrow against. I would err on the side of buying to those of you on the fence. It would piss me off to pay someone else's mortgage too.

After much contemplation, I think that we'll burn through the equity first, then the 529's (private school tuition is not a tax penalty), and then incur debt from that point if we have to.

I'm going to sound completely materialistic, but I'm beyond caring. This had better pay off in the long run.

Kelly

[PrincessFiona]

The only thing I'll add here, Kelly...is that of course buying is preferable...but you're going to be there 2 years. I also think it will be a huge hassle to try and put that house on the market 2 years after you have had to sell the other one...but I'm just lazy that way. And...don't you only have a home to borrow against if you have equity in it?

The cost of renting vs buying also depends on where you live. It would suck to finally finish fellowship and not be able to unload your house in time to buy your post-training home.

I would have loved to own our home during fellowship..and I was quite disappointed when our home purchase fell through...but...I have never been so relieved when I was able to walk away after two years....and our rent was less than our mortgage would have been....that being said, we lived in a real shithole...but...it was just for 2 years....if you're going to send the kids to private schools anyway....the house/neighborhood matters less.

just my opinion though....and probably not a popular one....

[quote="PrincessFiona"]It would suck to finally finish fellowship and not be able to unload your house in time to buy your post-training home./quote]


Ummm, yeah. It does suck. We were lucky to find someone to give us the mortage for our new place even while we're still paying on the other one - but it sure cuts back on the "Yay! We make money now, let's pay off debt and go out to dinner once in awhile!" fun.