Author Topic: 30 year interest only loan? SGIP? USCT?  (Read 2763 times)

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Offline scubasteve

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30 year interest only loan? SGIP? USCT?
« on: June 16, 2010, 10:36:49 AM »
Hey guys,

Is there a catch for this type of loan?  I talked to someone that recommended this loan to me because he said the following:

1) interest rate would be locked for 30 years
2) I'm only liable for the interest payment (about 800 lower than my current 30 year fixed conforming)
3) I could always pay 800 more a month that would go directly towards my principle

At the end of the day, he said it would be the same payments I'm making now, but if an emergency ever happened, I would only be liable for the lower payment vs paying the interest + principle. This sounds really good, but I have no knowledge on this type of loan and I wanted to see what you guys thought about this.

I've always been adverse to "interest only" loans, especially with what happened to the housing industry in recent years, but this kind of loan makes sense to me as a young person from what the guy told me. Please enlighten me!

Yes I'm thinking about refi-ing before I even make my first payment!
« Last Edit: June 16, 2010, 10:50:39 AM by scubasteve »

Offline USCTrojanCPA

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Re: 30 year interest only loan? SGIP? USCT?
« Reply #1 on: June 16, 2010, 10:59:52 AM »
Hey guys,

Is there a catch for this type of loan?  I talked to someone that recommended this loan to me because he said the following:

1) interest rate would be locked for 30 years
2) I'm only liable for the interest payment (about 800 lower than my current 30 year fixed conforming)
3) I could always pay 800 more a month that would go directly towards my principle

At the end of the day, he said it would be the same payments I'm making now, but if an emergency ever happened, I would only be liable for the lower payment vs paying the interest + principle. This sounds really good, but I have no knowledge on this type of loan and I wanted to see what you guys thought about this.

I've always been adverse to "interest only" loans, especially with what happened to the housing industry in recent years, but this kind of loan makes sense to me as a young person from what the guy told me. Please enlighten me!

Yes I'm thinking about refi-ing before I even make my first payment!

I will defer to SGIP as I'm not a loan expert.  That being said, I've never heard of them offering a 30-year interest only loan fixed for 30-years.  If they do, I'm curious what the interest rate is.
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Offline annabanana

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Re: 30 year interest only loan? SGIP? USCT?
« Reply #2 on: June 16, 2010, 11:24:25 AM »
Which bank is offering 30yr fixed interest only? I've only heard of 3,5,7,10 year fixed for the IO's.

Offline scubasteve

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Re: 30 year interest only loan? SGIP? USCT?
« Reply #3 on: June 16, 2010, 11:26:13 AM »
Which bank is offering 30yr fixed interest only? I've only heard of 3,5,7,10 year fixed for the IO's.

My classmate is actually in the banking business so he's going to get back to me on all the info...  I'm still weary right now because I have no knowledge on this type of loan...I'll update you guys once I find out...

Offline fe9000

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Re: 30 year interest only loan? SGIP? USCT?
« Reply #4 on: June 16, 2010, 01:26:03 PM »
Hey guys,

Is there a catch for this type of loan?  I talked to someone that recommended this loan to me because he said the following:

1) interest rate would be locked for 30 years
2) I'm only liable for the interest payment (about 800 lower than my current 30 year fixed conforming)
3) I could always pay 800 more a month that would go directly towards my principle

At the end of the day, he said it would be the same payments I'm making now, but if an emergency ever happened, I would only be liable for the lower payment vs paying the interest + principle. This sounds really good, but I have no knowledge on this type of loan and I wanted to see what you guys thought about this.

I've always been adverse to "interest only" loans, especially with what happened to the housing industry in recent years, but this kind of loan makes sense to me as a young person from what the guy told me. Please enlighten me!

Yes I'm thinking about refi-ing before I even make my first payment!


You are locked in on the interest rate but your interest only payment is only for the first 10 years (could be 15, I don't remember).  However, you have to make sure you are ok with the recast payment once it goes into P&I payment schedule.  I know it's still some time down the road, but who knows what the property value going to be and if you are able to refi out of it. (That's how we got into trouble now).  Personally I am not a fan of it, because of the risk and reward.  You are not getting that low of interest rate, and the price you are paying for 30 year IO is much higher (meaning for the same rate, higher discount points or higher rate with the same discount point).

Also think about the opportunity cost of the $800 that you are not paying towards your home.  Are you planning on really using that money to generate higher return for you? or you want to live a less stress life.  If you are a savvy investor who can be the smart money in the room, more power to you and go with a 5/1 IO with a much lower interest rate and take on more risk.  If not, I would stick with the basic stuff and focus on other things in you life such as school, work and kid.  Those are the same thing I am trying to juggle now and I am glad that I don't have to worry about moving money around.

Offline scubasteve

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Re: 30 year interest only loan? SGIP? USCT?
« Reply #5 on: June 16, 2010, 02:29:02 PM »
Hey guys,

Is there a catch for this type of loan?  I talked to someone that recommended this loan to me because he said the following:

1) interest rate would be locked for 30 years
2) I'm only liable for the interest payment (about 800 lower than my current 30 year fixed conforming)
3) I could always pay 800 more a month that would go directly towards my principle

At the end of the day, he said it would be the same payments I'm making now, but if an emergency ever happened, I would only be liable for the lower payment vs paying the interest + principle. This sounds really good, but I have no knowledge on this type of loan and I wanted to see what you guys thought about this.

I've always been adverse to "interest only" loans, especially with what happened to the housing industry in recent years, but this kind of loan makes sense to me as a young person from what the guy told me. Please enlighten me!

Yes I'm thinking about refi-ing before I even make my first payment!


You are locked in on the interest rate but your interest only payment is only for the first 10 years (could be 15, I don't remember).  However, you have to make sure you are ok with the recast payment once it goes into P&I payment schedule.  I know it's still some time down the road, but who knows what the property value going to be and if you are able to refi out of it. (That's how we got into trouble now).  Personally I am not a fan of it, because of the risk and reward.  You are not getting that low of interest rate, and the price you are paying for 30 year IO is much higher (meaning for the same rate, higher discount points or higher rate with the same discount point).

Also think about the opportunity cost of the $800 that you are not paying towards your home.  Are you planning on really using that money to generate higher return for you? or you want to live a less stress life.  If you are a savvy investor who can be the smart money in the room, more power to you and go with a 5/1 IO with a much lower interest rate and take on more risk.  If not, I would stick with the basic stuff and focus on other things in you life such as school, work and kid.  Those are the same thing I am trying to juggle now and I am glad that I don't have to worry about moving money around.

Thanks for the info.

5/1 IO is way to much risk IMO considering that rates are at their historical lows...

Aside from being able to throw that $800 into a CD/online savings, etc and using it to repay your principle in 10 years (low risk; 96,000 compound interest over 10 years before you have to start officially paying principle), I think worst case, I would just take that $800 and put it back into my principle and just have the flexibility of not having to pay that $800 in the event that an emergency happens.  I think the missing information right now is what is difference in rates between 30 year P/I or 30 year IO....

« Last Edit: June 16, 2010, 02:31:49 PM by scubasteve »

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Re: 30 year interest only loan? SGIP? USCT?
« Reply #6 on: June 16, 2010, 04:55:09 PM »
I like ARM loans for a number of reasons - flexibility, assumability, and a firm belief that the sky is not falling. Rates will not crest above 6.0 anytime soon. If they do, we've got a great deal more problems on our hands than just a 6.0% average mortgage rate. Might they spike? Sure. Will they? Not IMHO.

That said however in this market I'd rate IO loans an "A" for "AVOID".  Fixed rates are very low today. P and I payments are reasonable. Assuming a $729,750 loan amount, the IO payment is about $900 less than the fully amortized payment. If you've got a problem paying the principal, most lenders today are willing to work with you on some sort of forbearance, depending on circumstance. Interest only loans are being shunned by Freddie Mac. Fannie Mae has made it so difficult to get an IO loan that you've got to turn water into wine as proof you are capable of managing this kind of mortgage.  The headache and likelyhood that the payment benefit might never be used is no reason to turn to an IO loan.

Our company, like most, do allow you to recast your fixed rate amortization path if you prepay your loan by more than $10,000 at a time. We have a 1 time per year opportunity to do so. This feature used to be a selling point for IO ARM loans - you pay down the mortgage and your payment adjusted. Now that investors are willing to do essentially the same thing the IO loan benefit structure is just getting thinner and thinner.

There is a place for IO loans in certain circumstances. I spoke with a borrower today who has an IO loan he wanted to refi to avoid higher future rates. I suggested that he keep his ARM loan, expected to drop to 3.75% instead of taking a 4.875% fixed loan, and pay the 4.875% payment now. We ran the amortization pathway and he's better off with the deal he has. (there of course were other factors. I'm summarizing the conversation).

Please remember this is a general reply to a general question. There are often specific reasons to consider loan type 1 over loan type 2 so make sure to speak at length with your mortgage professional to get the right answer and not simply a quick one.

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Offline scubasteve

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Re: 30 year interest only loan? SGIP? USCT?
« Reply #7 on: June 18, 2010, 03:29:20 PM »
Well I just found out a little bit more about this type of loan...

1) Interest rate is only locked for first 10 years (4.75%) then resets every year to market rate (not sure why it would be called a 30 year IO loan then?)
2) Loan becomes P&I after 10 years.

This just sounds like a 10 year ARM to me...... 

In any case, I think I'm going to go with a 4.75% 30 year fixed if the guy can get it for me....

Offline fe9000

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Re: 30 year interest only loan? SGIP? USCT?
« Reply #8 on: June 18, 2010, 10:19:45 PM »
Well I just found out a little bit more about this type of loan...

1) Interest rate is only locked for first 10 years (4.75%) then resets every year to market rate (not sure why it would be called a 30 year IO loan then?)
2) Loan becomes P&I after 10 years.

This just sounds like a 10 year ARM to me...... 

In any case, I think I'm going to go with a 4.75% 30 year fixed if the guy can get it for me....

I think there may be mis-understanding here.  What you described is a 10/1 IO arm.  I think what the person is trying to say is the IO payment is for the first 10 years, then the payment will change to PI and it's amortized to 20 years.  So your payment shock is high.

In any case, I still don't think it's a good loan.  You can't go wrong with 30 year fixed at 4.75%.

 

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