I want to have a debt consolidation idea,can anyone help me?
A friends was telling me about how he lowered his monthly mortgage
payment ( debt consolidation ) by refinancing their mortgage with a
5-year interest only mortgage.
He didn't see himself in the house for more than five years and sold
on the idea that an interest only mortgage was the way to go.
I'm gathering facts, stats, and news about this topic for my Web
site... any thoughts (good or bad) or stories about an interest only
mortgage you can share?
This sounds like the old fashioned (early 20th century) "standing mortgage".
You borrowed the money to buy your property, and were obligated only for
interest payments. The principle was never amortized, so the mortgage
lasted forever (until you sold the property, or died, when the estate either
paid it off or the bank got the property). My grandparents bought their
house this way, and made monthly mortgage payments for something like 60
years.
The standing mortgage is credited (or blamed) as one of the factors that
made the Great Depression so bad - because principal was never reduced,
people never paid off their loans, so when banks started to fail they'd call
the mortgage, and people didn't have the money to pay it off so would lose
their homes. Or when someone lost a job he didn't have any equity, couldn't
make the payments, and lost the house.
Macro-economics aside, it strikes me as a pretty stupid idea. On my first
house (almost 25 years ago), the monthly principal and interest payment was
about $500. Because things weren't quite finished when we went to closing,
the funds weren't released to the builder, so the bank couldn't charge us
interest. For the first couple of months, all we were required to pay was
the amount of the payment that went to principle. The first month, it was
something like twenty-five cents (prorated since we didn't close on the
first of the month). If we had had a standing mortgage, it would have saved
us around twenty dollars a month on the payment.
Well, houses cost more these days, but interest rates are a lot lower. I
suppose you could save a hundred bucks or so on a $100,000 loan by not
paying any principle. But you're gambling that at the end of five years
you'll be able to either refinance or sell for enough to pay off the loan,
and unlike with a conventional mortgage, you'll have no choice, that five
year term will force you to do one or the other whether it's to your
advantage or not.
-Lower payments are not everything. Consider that your friend
will not be payin g down principle and therefore will not be
building up equity. Granted, there won't be much equity built
up from priciple payments in the first few years. But anyone who
is planing to own a house for a longer term will want to be
paying down principle.
Another way to lower payments would be to look into an ARM with
a five year lock. ARMs tend to have lower intrest rates and
corosponding lower payments. The five year lock will fix the
intrest rate for the first five years of the loan.