I/O (Interest Only) Mortgages, Good or Bad?

11 Replies

Very Good financing tools! As a Mortgage Broker, when you hear someone say I/O (Interest Only) mortgages are bad, the very first thing you think is that you're talking to someone who doesn't know squat!

...."Oh, we had an Interest Only mortgage back in 2005 and we ended up doing a short sale."  Oh my gosh, give me a break!  And who said you couldn't make the higher Amortizing payment during the OPTIONAL interest only period?

Number one, you were supposed to have used the low, tax deductible (I/O) payment to start knocking down that 50k in Non-Tax Deductible Credit Card debt that was eating you alive at the time and then start hitting Principle Reduction or were to increase your monthly "Matched" 401k contribution for retirement, etc.

But what did you do?  You did none of the above and instead you bought new cars and ran up even more credit card debt and didn't save a dime!

Number two, then when your I/O loan started to re-amortize and values started to drop, did you down size in cars? No. You blamed the mortgage industry and filed for BK, went FC and/or did a Short Sale! Or gotta love the classic, the borrowers who only had 5% or nothing to put down and were given a chance to become a homeowner, years later say they should have put more down, as if that extra 3.5% or 5% down payment would have made a difference when values dropped 40%!

NOTE: and had the government and industry not allowed it to become so easy to go BK, FC or to do a Short Sale, there would not have been such an avalanche of borrowers walking away from their Financial Obligations and Promises To Repay and values would not have plunged so far down!

Well, I/O mortgages are making a comeback, but hopefully this time borrowers will respect and use them for the awesome financing tool they're meant to be and not act like a deer caught in the headlights when after 5yrs of choosing to make the OPTIONAL interest only payment that the loan balance is still the same!

Steve McRory, Lender in FL (#360492)
888-662-4404

@Steve McRory , over the first 5 years we might as well go with Interest-only, seeing as with a normal 30 year amortized loan, we'd only have paid off ~8% of our principal anyway!

So Steve, how is that I/O Interest Rate looking, vis-a-vis current 30yr "normal" one? Cheers...

Most would say that I/O loan rates in the 5s range are pretty strong, would you agree?

However, the loan amount needs to be over 200k to start seeing the intended benefit of a lower I/O mortgage payment.

Usually, there's a small rate adjustment of .250, so under 200k loan amounts there's not enough payment savings to justify this difference in rate.

And for all those who wanna bash and refuse to consider the I/O mortgages I ask this question: if you're so worried about the interest rate, when is the last time you made extra principle reduction payments on your car notes, which for most, unlike Mortgage Interest, car note interest is Non-Tax Deducible?  

Steve McRory, Lender in FL (#360492)
888-662-4404

My message for everyone would be: only consider I/O loans for properties in areas known to continually appreciate (and you're scoring the property at a good discount)!...

or...want to focus on paying off NON tax deductible, much higher payments on a car note

or want to focus on diversifying and increasing your 401K, IRAs and other retirement savings contributions.

or...want to invest in more real estate and have the I/O payment OPTION available to fall back on during tight times or unexpected investment opportunities, etc.

I can go on and on...  

Steve McRory, Lender in FL (#360492)
888-662-4404
Originally posted by @Steve McRory :

or...want to focus on paying off NON tax deductible, much higher payments on a car note

or want to focus on diversifying and increasing your 401K, IRAs and other retirement savings contributions.

or...want to invest in more real estate and have the I/O payment OPTION available to fall back on during tight times or unexpected investment opportunities, etc.

I can go on and on...  

Yeah, but, if my first two things aren't mandated, I reckon those other things are just a fiddle...

Generally the American consumers are financially illiterate. Without tight government controls they are like lemmings headed to the cliff. They are driven by immediate gratification and rarely consider the consequences. Canadian consumers were not hit very hard by the recession of 2008 due primarily to our very tight financial regulations and since then they have tightened up even more for home buyers and the like. 

I see every day in the US a loosing up on regulations and that combined with the growing of your economy will, in my opinion, lead to another crash.

American consumers and the regulatory bodies have learned nothing from their mistakes and once again you will be facing the very same abuse of credit. Home buyers will once again be allowed to get into zero down low interest buying with no fore thought as to how they are going to pay for it.

We see it on here every day and it is growing. Most will fail and so will your financial house of cards. Regrettably the mantra "America First" is not at all understood by the by the American consumers and each individual has a different interpretation of what it means.

History is regrettably destined to repeat. 

On th eup side when the shoe drops smart investors will have a feeding frenzie once again. Canadien investors will again flood in to snap up virtually free properties. 

Here's what I tell borrowers;  when you go to my website and see me advertising:

100% LTV - One day out of BK

100% LTV- NO DOC, Option Arm with 1.00% payment rate

...and your barber is giving you stock advice...SELL! SELL! SELL!

Sell all your properties and mutual funds and get completely liquid like my CPA advised to do in 2006.  Which I told him he was nuts, not with 70 million baby boomers  about to retire!   They ain't moving to NY or NJ for the cool winters, they are all headed here to FL!

Then told my wife on our way back from another 360k rental property purchase closing when she asked me, "what if values go down Steve?"    ..."Babe, believe me, with 70 million baby boomers retiring, Florida real estate is safe, appreciation may level off, but values are not going to go down!"

HA!!   Yeah, right!   But at least next time we'll see the crash coming a mile away and bail off the train!     

Steve McRory, Lender in FL (#360492)
888-662-4404

I actually agree with a lot of what @Thomas.s posted above, so knowing this, now is the time to invest and snatch up as much FL real estate as possible.

Buy and hold until the type of consumer @Thomas.s is describing starts jumping in, then SELL at the peak, before it all comes crashing down again!

Steve McRory, Lender in FL (#360492)
888-662-4404

Interest only mortgages are OK --BUT--sooner or later you have to pay them off. The more important question is: WILL you be able to pay it off when due? I recently borrowed 120K interest only for three years. I am paying the monthly interest as well as putting away $3500 a month so I can write a check when the loan matures. S0, basically I am "paying" $4150 a month for a rental that grosses $1000/month. I am good with this, however, without other income streams this would be a bad deal and would sink me. 

John Thedford, Real Estate Agent in FL (#BK3098153)
239-200-5600

@johntelford, run the numbers real quick on a 300k loan amount at 4..5% in a regular DODD FRANK harder to qualify Fannie program and run the payment on an I/O @ 4.75%, then even if you add another 2.00% in rate for adjustment should you keep a property past the I/O option period and tell us how that tax deductible payment difference would sink you or other responsible, good credit investors.

Steve McRory, Lender in FL (#360492)
888-662-4404

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