First personal residence with an interest only loan?

Question

Ben Wilkins · Answer

@Anssi Viljanen - this seems dangerous. You only get equity in refinance if the property appraisal swings the correct direction. Anything that you gain will probably be spent in transfer costs, appraisal costs, etc. Every time that you refinance, you pay those costs and gamble on whether the property will appraise. What happens if interest rates go up?

In this situation, you will never gain equity and will basically be paying interest... what is the difference between paying interest and never gaining equity, or paying rent and never gaining equity? The difference is that you now own the maintenance and can't rely on the landlord to replace the water heater or AC.

This sounds like a fantastic scheme for someone to collect interest from you forever, then reclaim the property if something goes wrong.

Unless if I'm missing something....

Chris Mason · Answer

Hi @Anssi Viljanen,

A lot of that seems like bad info was handed out, or something was lost in translation. Is this person qualified to give such advice?

Account Closed · Answer

Don't do it.  Seriously.

My experience with my own personal residence - I started with a 30 year conventional.  I refinanced into a 15 year.  Rather than trimming expenses down, I refinanced into an interest only first and interest only second mortgage - I was told the price of homes always go up.  It was a lie.

...I was upside down on my house in the blink of an eye.  THEN, the downturn came and I was even MORE upside down on my house.  I lost my job twice during that time frame due to mergers/acquisitions and layoffs.  I could easily (and was offered) jobs out of state, but I couldn't move because I was upside down on the house, no equity to mess with, and I couldn't rent it out because the rent wouldn't cover the mortgage OR the PMI, let alone insurance on the property.  I was stuck...a foreclosure waiting to happen.

Eventually, I refinanced (when I gained enough equity to do so) into an 8 year mortgage.  My payment is currently higher than rent (by about $400/month) but I have about $130,000 in equity so I have options going forward.  Ironically, I'll have the house paid off after owning it for 30 years - the same place I started!

Account Closed · Answer

sounds like the ghost of Angelo Mozilo is giving advice

https://blogs-images.forbes.com/nathanvardi/files/...

Anssi Viljanen · Answer

Thank you for sharing your story

Account Closed I figured that 30% tax break concept seemed a little far fetched.

I definitely wouldnt go for his idea but I was curious if there was anything valuable in there after peeling back the layers. Evidently not. Thank you gents!

Account Closed · Answer

@Anssi Viljanen  one thing that was a bit deceptive in his comments to you, while it used to be you could deduct interest on your primary residence even after refinancing  "every time you refinance you renew your new home owner status" that has changed.  You are limited to how much interest you can deduct on your taxes.  Here are the new interest rules.  While it's not likely you will hit that limit, it is something you should consider...

[quote]

Home acquisition debt limit. The total amount you (or your spouse if married filing a joint return) can treat as home acquisition debt at any time on your main home and second home cannot be more than $1 million ($500,000 if married filing separately). This limit is reduced (but not below zero) by the amount of your grandfathered debt (discussed later). Debt over this limit may qualify as home equity debt (also discussed later).

Refinanced home acquisition debt. Any secured debt you use to refinance home acquisition debt is treated as home acquisition debt. However, the new debt will qualify as home acquisition debt only up to the amount of the balance of the old mortgage principal just before the refinancing. Any additional debt not used to buy, build, or substantially improve a qualified home is not home acquisition debt, but may qualify as home equity debt (discussed later).

[/quote]

Sean Cole · Answer

I wouldn't generally suggest taking on this kind of mortgage, BUT...On BP, many comments are made about "dead equity" sitting in your home and/or how foolish it is to only earn 3.5% (or whatever your mortgage interest rate is) by paying down the principal on your home instead of investing it elsewhere.  This idea is really just taking that idea to the extreme conclusion.

@Anssi Viljanen, interest you pay on mortgage debt is deductible on your taxes, but your own unique situation may mean that you may or may not see a benefit depending on the standard deduction and your total itemized deductions (I'm NOT an accountant, so talk to one).

Ali Boone · Answer

Super dangerous! And in my opinion, poor advice from a financial advisor.

Dangerous parts-

• Equity isn't guaranteed
• The balloon payment could tank you and you lose your property
• Refinancing a primary house mortgage is crazy, especially multiple times
• If for any reason you move out of the house prior to 30 years (likely), you've only paid interest on it. Not helpful.

This article is addressing a different question, but it's all the reasons I rent my apartment in LA and only invest in rental properties. It talks about the financial burden of owning a house period, then add the risks of an interest-only loan on top of those-

https://www.biggerpockets.com/renewsblog/2014/01/1...

LA is really hard to buy your own house. It's cheaper, in my opinion, to rent. And way less liability and more mobility, and all of my investment properties actually bring in cash flow every month.

Harjeet Bhatti · Answer

@ Ben Wilkins All the product has positive and negative effects on your mortgage so does this mortgage. This is mortgage has own benefits. As the advisors says all the interest will be tax deductable and that money you are paying towards principal which will create equity on slower pace in your home but if you will spend somewhere else can produce more positive result compare to your equity in home.  But I have  different calculations.  Lets say you take a loan with $200000, 3.875% interest rate for 30 year amortization 7 year arm, when the payment is due at 84 month your equity position is $28380 according to loan amount not counting down payment. But if you will pay that average of principal amount on monthly basis your equity position is higher in interest only mortgage. Off course if you don't pay anything towards principal you are depending on market appraisal value only.

When someone take this kind of product which is rarely available right now because it was used wrongly. But if used carefully it has benefit also. All depend where you spend that saving. I can send you more details information if you want to send your contact information. Its hard to copy and paste that long worksheet.

First personal residence with an interest only loan?

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