May 23, 2007

HousingPANIC Stupid Question of the Day

Isn't an interest-only loan like a 100000000000000000000000000000000 year mortgage and then some? As in it never ends?
And why would someone who has an interest only loan call themselves a "homeowner"
Wouldn't that be like someone leasing a Lexus calling themselves a "car owner"


Anonymous said...

No, its actually like an ARM & a fixed rate product.

You get a 5 year I/O period w/ a payment that covers only ITI. Then for the last 25 years you pay PITI where principal is paid back over 25 years instead of thirty years.

So there is a payment shock after 5 years but its all principal so you start building equity the old fashion way. Hopefully you've got 5 years worth of equity via appreciation of the asset so you also can refi into a new 30 year fixed product.

If the lender layers an ARM over this product I'd pass.

Again its just another product that if suitable for the buyer then its worth it (e.g. an MD iin residency/internship and will get a big bump in pay before the 5 year I/O time period).

The problem is all these products that were designed around people who truly wanted the home and who would be getting a big jump in pay in 5 years were being marketed to people who would not have the expected bump in pay, but instead were just being given a few years of ownership that would end because the payment shock would not be met with an income rise!!

Anonymous said...

Interest only is rent with a tax deduction, which is better than rent without a tax deduction.

RiperDurian said...

To anon crowing about the tax deduction:

You are so ignorant it is simply delicious. So you pay a sh*tload of property tax and get a small portion of that back through a tax deduction. You are buying dimes with dollars you are a genius!

Don't forget the insurance payment.

Don't forget repairs/upkeep.

Don't forget the house you pay all this on is going to be worth less then you have borrowed when your interest only rope goes taught.

gt said...

i liken it to life on a respirator. i guess you're still 'alive' on planet earth, but come on, who are you kidding?

edd said...

Maybe dis:
Buy shack near drugroute in SD
with int-only no-down piggyback.
Price no matter; doubles in month.
(loan sausage sold to Asia/UK)

Pick up team at recruiting corner.
Epoxy paint over rot & bug holes.
Pour concrete over sags/problems.
Plywood with self-stik bath tiles.
Press-n-stik floors, or 'carpet'.

Maybe cheap shingles; much plaster.
Heavy paint; some flowers.
Franklins for inspector/appraiser.

Accept cash/barter/subprime.
Pay off int-only & penalty.
Net 40%.

fooman said...

Interest only is rent with a tax deduction, which is better than rent without a tax deduction.


Interest only is interest, taxes, and insurance with a tax deduction, which in most parts of the country, is 2-3 times the amount of rent with the standard deduction.

If you really think that is better, have at it!

Out at the peak said...

"Interest only is rent with a tax deduction, which is better than rent without a tax deduction."

Wow, if it were only that simple. Let's forget property tax, HOA, upkeep, commission, transfer tax, misc fees, and that property values are not guaranteed to go up. I've owned and will own again, but it is necessary to time the market if one wishes to protect paper profits.

Anonymous said...

Interest only is rent with a tax deduction, which is better than rent without a tax deduction.

Only for a little while. After the foreclosure/BK you will HAVE to rent. Unfortunatly you will need good credit and cash for a deposit/1st/last. GOOD LUCK.

honica jewinski said...

Yeah, it'd be just like renting. Except that over the long term, it would appreciate some, leaving you with what ever the difference between the sales price and the mortgage balance was. Sounds pretty dumb to me.

Anonymous said...

"Interest only is rent with a tax deduction, which is better than rent without a tax deduction."

would it be significant?

let's consider the case where you $750 a month in interest.

well, the tax break means you'd get a $250/month tax break or less than the standard deduction.

now maybe you have something expensive and you pay $1260 a month in interest so maybe you'd get $420 a month back in taxes which is still less than the standard deduction.

add in taxes, etc... and you're spending a hell of a lot just to get a tax break and, most likely-- at that point, the absolute cost of renting is cheaper!

Anonymous said...

1 hr to speak TOTAL TRUTH to AMERICA uncensored by Corrupt Big Media!!

Rate it:

Anonymous said...

Ron Paul speech 5/22/07

har said...

Its a way to put more risk on the lender (take that MBS holders!) and LESS risk on you if the housing market goes down and you walk away you lose less money.

Anonymous said...

Ha Ha Ha . . . .

"The couple are pulling out $15,000 a month from savings to cover their expenses, and they've already run through more than half of their nest egg. The irony: On paper they seem to be in great shape, with a net worth of $1.6 million. But since most of that money is tied up in real estate - assets they can't easily sell - it doesn't ease their current cash crunch.

Money is so tight that Carol has stopped filling prescriptions for her cholesterol medicine. Steve says he has no choice but to go back to work. "The financial pressure is too great," he says. "

turdly said...

I got nothin'. I really wanted to say something keen and cool, but wow, I just got nothin'.

Hey! How 'bout ZERO'S ARE FOR ZERO'S'

Sorry I'm stretching here. It's just too ludicrous to even acknowledge.

Anonymous said...

It's not like renting at all.

"Owning" means you get the appreciation/depreciation. Renting means you don't.

The terms of your financing whether it's 30 year fixed or 100% LTV IO or whatever don't matter much. That determines the amount of the initial loan you've paid over time and your initial payments.

Obviously there's less risk if you lock in a longer term loan at guaranteed rates vs. a shorter term loan.

The people who took out IOs in 1990 for a 200K shack in it's an 800K shack. Were they just renting? Or did they just make 600K? If they rented the owner gets the 600K. If they had an IO mortgage THEY get it, not the bank. The bank doesn't "own" the property, they have a lien against it and that's different.

Not saying it's smart to buy at 800K for the shack, but they did get the appreciation, even if they had a crappy low cost loan.

The 30 year fixed guy would have not only gotten the 600K but also the amount by which he paid down his 200K loan. But of course he paid more money.

Paul E. Math said...

Some people have a rather simplistic understanding of ownership. Like somehow it's more impressive to own than to rent.

It's like an IQ test when I tell people I rent - you fail if your reaction betrays any favour for ownership. Actually, you fail if you even ask if I rent or own - it's none of your business and makes no difference anyway.

If you 'own' but don't have any equity, especially right now, you are a complete and total idiot.

westwest888 said...

It'd be just like renting, except over the course of 30 years you'd pay the bank about $1,200,000 in mortgage interest.

A rule of thumb:

If (annual rent / roommates) < (taxes + insurance + fees + 1% home value for repairs) then rent.

The people who prize real estate are the ones who are within 10 years of retiring and have only $50k in their 401k. They talk about how great it is because it's their ONLY investment.

Guy Daley said...

Interest only? That's ugly and stupid but what about Helocs? Keith you should start a permanent thread called Schadenfreud of real life examples. I copied this off a blog:

Posted by: Greg Dantas | May 23, 2007 at 02:19 PM

I’d like to post a real life example of what’s been going on with MEW. I see a lot of charts and graphs but real life examples really illustrate the problem.
I have two family members who shall remain nameless that have done Their share of MEW spending.

Family member #1

House purchased in 2001 in NJ 115,000.
Mortgage amount financed 80,000.
Current mortgage balance 2007 200,000.
Spent an extra 20,000 a year for the past 6 years.

Family member # 2

House purchased 2002 in NJ for 124,000.
Mortgage amount financed 121,000.
Current mortgage balance 2007 245,000.
Spent an extra 24,487 a year for the last 5 years.

Now that these families have pretty much maxed out their house ATM’s there will be no more ridiculous spending. The other problem is that now, they have to service this debt which means even less spending.

I can’t possibly know the only two families that have been living large on MEW. I think the national figures for MEW are low. I believe we are at a point in this country where consumer spending is just going to fall off a cliff.

Personally I don't know anybody this stupid BUT according to the evidence on Craiglists and the tidal wave of toys for sale, I would say there are quite a number of people that have done this. Hehe and on top of all the toys for sale, FEMA is selling tens of thousands of travel trailers as well.

Anonymous said...

Interest only isn't so bad!

1) If you have other investments due to mature in the future and you pay it toward the principal the monthly payment will go down automatically. Less principal = less interest.

2) Most folks never pay off the mortgage anyway so why bother to try?

3) The government is so completely upside down, over-extended that their only choice is inflation, just as they have always done, and inflation favors the debtor. Borrow it today and pay it back with depreciated dollars tomorrow.

Anonymous said...

Real estate only goes up u dimwits!

Mike F said...

Like any bit of exotic financing, it makes sense only for the original people for whom it was designed. The problem is when it gets marketed to, and then bought by, people for whom it makes no sense.

"Redraw facilities" (I don't know what they're called in the US) made a hell of a lot of sense for small business owners or consultants who had irregular, large payments rather than steady paychecks. Then they started making them available for everybody. If you had the nous to sit down with a pencil for five minutes you would have been able to see it didn't make any sense. Sadly, people didn't.

I have an interest-only loan for investment purposes. It makes sense for me that instead of investing the $50k I had in cash, I paid it off my mortgage and borrowed the same amount to put into funds. The money is fungible, but for tax purposes, is treated differently (in Australia).

Somebody who had an investment strategy for the five year period where the money not being paid off the principal (Difference between the PITI and I/O payment) of the house was invested and was producing a real return higher than the interest on the mortgage would be doing something sensible. The lump sum generated by the investment could then be dumped on the mortgage at the end of that five years to produce a faster overall reduction of principal than would otherwise have been possible.

But these loans, like all exotic loans, are probably not being taken up only by borrowers for whom they were originally designed.

Anonymous said...

Interest only is rent with a tax deduction, which is better than rent without a tax deduction.

in CA it's 2 x Rent

Guy Daley said...

Signs of the times:

NPR (National Public Radio) had a lengthy article on foreclosures in (drum roll, no, not Phoenix, Vegas or Florida) Hennepin County which is Minneapolis and suburbs. It was all about foreclosures and the impact they have on neighborhoods.


First of all I want to give credit to Craiglist for being so informative on the Housing/credit bubble. Craigslist provides so many clues about the state of the economy far more than a moron President's state of the economy speech which is going to be nothing but lies anyway.

Okay, so, having problems making your mortgage payment, what do you do? Sell your toys AND RENT A ROOM.

The number of listings for renting a room TODAY (that means ONE DAYS Listings) for Phoenix was so great, I didn't feel like counting them. I've got free time but not THAT much free time.

The clues are out there people. Its just a matter of noticing them. P.S. I think the rent is negotiable on a lot of those room rentals.

Anonymous said...

Anon 8:32 PM said: "Interest only is rent with a tax deduction, which is better than rent without a tax deduction."
With all others comments, you still forgot the big liability (loan) that renter doesn't have.

Brad Landis said...

Interest-only loans are the optimal flexible loans because they let you to pay principal when you want to. Its the Neg Amo loans, not interest only loans, that are pernicious.

Anonymous said...

IO loans dumb, wait... Stupid.
Stupid now, but without those loans I couldn't have done what I did.

I was your favorite whipping boy, the baby boomer house flipper in Phoenix.

I got into no money down IO loans early and bought several properties that way. The market in Phoenix was unbelievable from 2000 through August of 2005.

I got out in July 2005 and sold all but my personal residence and one rental.

This financing allowed me to carry the lowest possible payments and the highest level of inventory.

Of course those who waited too long are paying a hefty price for their greed but I came out smelling sweet.

Happy baby boomer in Glendale AZ

Anonymous said...

Video showing a Sacramento house with no takers at 50% off. Who said RE never goes down?

ps. same trash can podium at court house steps that was used on 2 of Casey's houses.

Anonymous said...

As far as I know IO loas are IO for fteh first 10 years then convert to P+I for the remianing 20 years. Within the first 10 years paying IO is smart if the home will appreicate. Buying today that's not so much a guranatee. Having bought in 2005 or buying in 2008 it's a pretty good bet that within 10 years the house will be worth more than sales price.

Looking at that, I don't see the problem with IO loans. As someone else stated it's the ngative option that are killer.

The problems in the past few years with IO loans were that many took out HELOCs on top of the IO. Then when the value of the house decrased they were fucked. But that wasn't the IO loan's doing.

Anonymous said...

South African property market has yet to blow, but when it does it's going to be spectacular - remember, we were top of the list for house price gains for two years in a row

The Thinker said...

I believe it has been said, but the idea of most IO loans is that you are supposed to pay principal when you can, but you have the safety of knowing that if you can't, you can always just pay the interest. This may be good for a person with a large, but irregular, income, such as a real estate agent.

What is unfortunate is that these loans were marketed to the wrong people.

Also, I love how loans are called "products" as if they were articles of manufacture. I suppose it is a euphemism, like everything else.

RayNLA said...

Anonymous said...

Interest only is rent with a tax deduction, which is better than rent without a tax deduction.
Interest only is rent with a tax deduction, which is better than rent without a tax deduction.

Ok... So what do you call interest only when values go down 10%-15%and your ARM is about to reset?


Or that other "F"


Anonymous said...

"Ok... So what do you call interest only when values go down 10%-15%and your ARM is about to reset?

Ans: A soon to be bitter renter that's been 1099'd.

Classic!!! :-)

Mike F said...

I thought we were debating the value of IO loans. Can we keep that separate from the other debating points?

Whether buying real estate (right now or ever) is a good idea (for living in or renting out) is a completely separate issue.

Clarity of thought is key when making financial decisions.

Confusing these issues, and lumping them all into the same basket:

Whether RE is a good investment.
Whether your RE purchase, if your own home, should be considered an investment at all.
Fixed vs variable.
Whether borrowing against "equity" is ever a good idea.
Established communities vs new developments.
Rent vs buy (and what are the metrics that go into that decision).

isn't particularly smart.

I think we can ALL agree that the RE market is seriously overpriced in many markets, and also that there has been some egregious behavior by agents, brokers, and financial institutions which has enabled and encouraged the greedy and the ignorant to produce a truly horrifying situation.

Nonetheless, people have, historically, bought and sold RE. Even you "bitter renters" have to rent your homes from somebody. Right now, you're getting a very good deal. At other times, less so.

Keith's done a very good job on this site in showing just how speculative the market had become. He did it (mostly) by pointing this out with statistics.

Please don't turn Renting vs Buying into a religion. It's really just a financial choice, and it should be an informed one.