Just a quick note: A reader brought to my attention this article in the SF Chronicle. Most of it is the typically bland and not very informative stuff. Until this that is:Roughly 80 percent of home purchases in the Bay Area were financed using adjustable-rate mortgages...
San Francisco mortgage research firm Loanperformance.com found a whopping 50 percent of buyers in the Bay Area this year used interest-only loans, compared with 45 percent of borrowers statewide and 31 percent nationwide.
3 comments:
This article is not clear on what kinds of IO loans they are talking about. I have a fixed interest loan that is IO for the first 5 years and amortizes over the subsequent 25 but the rate is fixed for 30 years. Yes, my payment jumps in year 6 but it is NOT an ARM and I don't think it is particularly risky. This is misleading by painting all IO loans as ARMs.
Yes, my payment jumps in year 6 but it is NOT an ARM and I don't think it is particularly risky.
Perhaps you're in a better situation than many home(debt)owners, who take the IO/ARM route simply to make the monthly payments? Or, are you doing an ARM to generate "positive cash flow" for the short-term, hoping that appreciation will keep you ahead of red?
I am not too concerned about negative cash flow but my thinking was that I/O for the first 5 years eased the pain a bit and the jump at year 6 (20% or so) was probably less than the associated increased in rent over that period so at worst, in year 6, I would back to where I am today. I would also expect (or hope) that my salary would be > 20% higher in 5 years' time.
Personally (and I suspect this is heresy on these boards), I think the traditional 30 year amortizing loans are dumb. You will not likely stay in the house for 30 years and the amount you pay the loan down compared to the appreciation over such a time is insignificant. Let's say you bought a Marin home (a Terra Linda eichler to be precise) in 1971 for $41k that is currently worth $850k. Had you bought that with 10% down I/O, today you would have a $35k loan that was costing you $175/month. Who cares? What is the difference between $175(which is 100% deductible, incidentally, because there is no principal pay-down) and 0 in today's dollars?
Although the 1% teaser-rate ARMs that fluctuate wildly after 5 years are great at grabbing headlines and villifying the I/O loan market, there are plenty of safer I/O loans out there.
There are also 10/30 I/Os as well that are I/O for the first 10 years. Sadly, I cannot find a I/O loan that never amortizes.
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