5 year Interest only ???

lobe50 · Joined: 21 May 2008 Posts: 2

Hi All

I am in the process of finalizing my final mortgage on our new home.
I had the choice of a 30 yr fixed at 5.75% or a 5 year Interest only at 5.5% fixed for 5 yr.

My financial guy suggests the 5 yr so our payment responsibility is more flexible and we can invest some money at the same time.

My worry is the "what if" of if rates will rise / fall??

If the hopefully fall w/i 5 yrs it hopefully will be enough to justify the refi closing costs.

If rates go up I worry I will be stuck in this loan or forced to refi for the same or higher rate??

any input would be greatly appreciate :)
THANX

m2c · Joined: 03 Aug 2005 Posts: 743

I don’t think the spread is enough to justify the risk and this is coming from someone who took a 5-1 IO. Spread was 5/8% then and index was not at or close to a nadir as I suspect it is now.

Beware of the look-what-you-earn-by-investing-the-difference approach. The mark typically overestimates his financial acumen and then you’re off to the races with compound interest! You might look at the choice this way. Take the 5-1 at 5.5% and pay the P&I at 5.75% fixed. Your outstanding balance will be lower when compared to the 5.75% fixed after 60 months. Now what would the interest rate be after 5 years to maintain the 5.75% P&I. Answer: 5.91%. How does that rate compare with the current index plus margin? Is the index really going to stay that low for that long? My guess is that the odds are worse than the lottery.

This is not to say that the 5-1 IO may not be a viable choice but it depends on other factors. For example, you may be bonus income you want to apply to the mortgage periodically and receive the “benefit” via lower payment rather than shortened loan term as with fixed rate. Ditto if you project any other large influx of cash, e.g. waiting to sell current home, etc.

All things being equal, I’d go with the fixed.

lobe50 · Joined: 21 May 2008 Posts: 2

Thanx

I planned on paying towards the principal on the 5 yr IO, and then refi'ing b4 the 5 yrs is up. HOPEFULLY the Interest rates go down some in the mean time and the refi makes more sense.

Don't we wish we had a crystal ball.................

mdrosens · Joined: 23 May 2008 Posts: 4

It's a no-brainer. Unless there is a SIGNIFICANT chance that you'll be out of the home within the 5 yrs, take the fixed. Your ARM would likely adjust to 2.25% (or 2.5%) margin PLUS the LIBOR rate on adjustment day. Today that would be 2.25 + 3.08 = 5.375% (rounded to nearest 1/8) GREAT!! But just 1 year ago today LIBOR was 5.34%, making your new rate 7.5% (or 7.75%). Then it would adjust every yr again after the first five. MORE IMPORTANTLY, if you choose to refinance rather than take the adjusted rate YOU WILL HAVE TO PAY CLOSING COST AGAIN. Take the fixed now. Peace of Mind and likely less $$

TimtheMortgageGuy · Joined: 16 Jan 2008 Posts: 28 Location: Rosemount, MN

lobe50 wrote: Hi All

I am in the process of finalizing my final mortgage on our new home.
I had the choice of a 30 yr fixed at 5.75% or a 5 year Interest only at 5.5% fixed for 5 yr.

My financial guy suggests the 5 yr so our payment responsibility is more flexible and we can invest some money at the same time.

My worry is the "what if" of if rates will rise / fall??

If the hopefully fall w/i 5 yrs it hopefully will be enough to justify the refi closing costs.

If rates go up I worry I will be stuck in this loan or forced to refi for the same or higher rate??

any input would be greatly appreciate :)
THANX

Of coarse he is! All overly agressive financial "advisors" want their clients to do maximum financing on interest only loans so the borrowers can keep pumping money into investments and into the advisor's pockets. :shock: :shock: