Need help with Interest-Only Mortgage and the Benefits (if any) of Paying Principal in this Housing Market...
December 31, 2008 1:49 PM Subscribe
Is paying principal on an Interest-Only (I/O) mortgage a smart idea when housing prices are not appreciating and there's a strong likelihood that:
a) I'll put this home up for sale before my adjustable I/O mortgage adjusts, and
b) Our home won't significantly appreciate or depreciate by the time we try and sell.
Keep in mind that while you can put your home up for sale before the mortgage adjusts, it might not sell before that time, so don't count on it. If you won't be able to afford the mortgage when it adjusts, then unload the house immediately or seek out a way to alter the mortgage in some way so that you'll be able to afford it until it's paid off.
posted by incessant at 2:11 PM on December 31, 2008
posted by incessant at 2:11 PM on December 31, 2008
saeculorum: "The amount by which your house appreciates or depreciates is equivalent to the rate of return on your principal.
The opportunity cost of putting your money into the your mortgage is saving it in either a high yield savings account or putting it in the market. If you expect a high yield savings account or the market to gain interest more than your house will appreciate, it's not worth it to pay down your mortgage."
I think you're mistaken here-- whatever gain or loss you'll get upon selling the house you'll get regardless of whether you've paid down the principal or not.
Paying down principal means you don't have to pay interest on that portion-- pay down $1000 on a 5% loan and you're paying $50 less per year. If you instead put it in a bank at 6% you'll make $60 and come out ahead.
Basically, appreciation is mostly irrelevant to your question. If it rises, you get money when you sell. If it falls, and you haven't been paying down principal, you'll have to make it up, or you default. Paying down principal reduces the risk of default, but you're just as well off keeping it in a savings account if you get a better rate there. Note: if the housing prices really tank, not paying down principal makes it much more attractive to you to default later.
posted by alexei at 4:39 PM on December 31, 2008
The opportunity cost of putting your money into the your mortgage is saving it in either a high yield savings account or putting it in the market. If you expect a high yield savings account or the market to gain interest more than your house will appreciate, it's not worth it to pay down your mortgage."
I think you're mistaken here-- whatever gain or loss you'll get upon selling the house you'll get regardless of whether you've paid down the principal or not.
Paying down principal means you don't have to pay interest on that portion-- pay down $1000 on a 5% loan and you're paying $50 less per year. If you instead put it in a bank at 6% you'll make $60 and come out ahead.
Basically, appreciation is mostly irrelevant to your question. If it rises, you get money when you sell. If it falls, and you haven't been paying down principal, you'll have to make it up, or you default. Paying down principal reduces the risk of default, but you're just as well off keeping it in a savings account if you get a better rate there. Note: if the housing prices really tank, not paying down principal makes it much more attractive to you to default later.
posted by alexei at 4:39 PM on December 31, 2008
Yes, you are conflating two concepts: the market price of a commodity and the balance on a loan.
No matter what the house does in the marketplace, you still owe the bank what you borrowed.
Or, what alexei said.
posted by gjc at 7:16 PM on December 31, 2008
No matter what the house does in the marketplace, you still owe the bank what you borrowed.
Or, what alexei said.
posted by gjc at 7:16 PM on December 31, 2008
If you're paying interest only, you're just renting -- except you've assumed a big-ass bucket of risk.
posted by dhartung at 12:10 AM on January 1, 2009
posted by dhartung at 12:10 AM on January 1, 2009
dhartung: "If you're paying interest only, you're just renting -- except you've assumed a big-ass bucket of risk."
True nuff-- 'cept, if it's a no-recourse loan, you can dump most of that bucket right back into the bank's lap. That's the beauty of the thing.
posted by alexei at 5:21 AM on January 1, 2009
True nuff-- 'cept, if it's a no-recourse loan, you can dump most of that bucket right back into the bank's lap. That's the beauty of the thing.
posted by alexei at 5:21 AM on January 1, 2009
I am mistaken here. I wasn't thinking at all when I posted my comment. Listen to alexei. He's right and I'm wrong. Oops.
posted by saeculorum at 10:01 AM on January 1, 2009
posted by saeculorum at 10:01 AM on January 1, 2009
We have an interest-only mortgage as well. Originally, we were making one extra payment a year, and were investing what we weren't putting in the mortgage. When the market started to turn, we moved that cash to pay down principal instead.
I/O loans are good for keeping your cash flexible if you have an irregular income, but dhartung is right: "If you're paying interest only, you're just renting -- except you've assumed a big-ass bucket of risk."
posted by mozhet at 2:49 PM on January 2, 2009
I/O loans are good for keeping your cash flexible if you have an irregular income, but dhartung is right: "If you're paying interest only, you're just renting -- except you've assumed a big-ass bucket of risk."
posted by mozhet at 2:49 PM on January 2, 2009
This thread is closed to new comments.
The amount by which your house appreciates or depreciates is equivalent to the rate of return on your principal.
The opportunity cost of putting your money into the your mortgage is saving it in either a high yield savings account or putting it in the market. If you expect a high yield savings account or the market to gain interest more than your house will appreciate, it's not worth it to pay down your mortgage.
posted by saeculorum at 2:01 PM on December 31, 2008