30 year fixed w/ 10 year I/O option

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John Shaw_IHB

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<p>What do you think of this loan?</p>

<p>The i-rate is fixed for 30 years. You have the option to pay just interest for the 1st 10 years. In year 11, the principle balance is re-amortized for 20 years. Obviously, paying just interest for the 1st 10 years will cause the monthly payments to jack way up in year 11. But, what if a person payed principle & interest during the 1st 10 years. It would be nice to know that if you had a bad month (job loss, car trouble, etc), you have the option of just paying interest.</p>

<p>so.... watcha think?</p>

<p>Thanks</p>

<p> </p>
 
At first glance, I like it. :)





What is the rate on this type of loan and how does it compare to regular fixed 30 year loan?
 
I don't recommend buying a home without several months of emergency cash stowed away. I would rather just get a traditional 30 year fixed and pull from an emergency fund if there is a bad month.
 
<p>"What is the rate on this type of loan and how does it compare to regular fixed 30 year loan? "</p>

<p>~6.5%ish 10/30 (varies from a traditional 30 year fixed by about 1/4%)</p>

<p> </p>
 
"

I don't recommend buying a home without several months of emergency cash stowed away. I would rather just get a traditional 30 year fixed and pull from an emergency fund if there is a bad month. "



What if you want to throw your savings in as a down payment?
 
If you do this I recommend you make sure the loan has a monthly recast feature. That way as you make principal payments or extra principal reduction payments, the loan will recast and recalculate your new interest payment based on the new lower principal balance.
 
Personally, I don't like the loan for reasons discussed here: <a set="yes" linkindex="29" href="http://www.irvinehousingblog.com/2007/03/01/financially-conservative-home-financing/" title="Permanent Link to Financially Conservative Home Financing">Financially Conservative Home Financing.</a>





To me it is just renting from the bank. You have all the problems of an adjustable rate loan as you still face an unaffordable recast in 10 years. It is a time bomb with a longer fuse. Affordability products like this one are common when things are not affordable (big surprise). Just because you can finance something doesn't mean you can afford it.


<em>


" It would be nice to know that if you had a bad month (job loss, car trouble, etc), you have the option of just paying interest."</em>





This is the slippery slope to financial ruin. This "option" is why everyone got in trouble with Option ARMs. Human nature would dictate that you will exercise the "option" to make the lower payment every month. When given the opportunity to pay a lower price to obtain the same object, people will always choose the lesser amount. Making an additional $500 payment on a $500,000 loan isn't very motivating or satisfying, so people just don't do it.





Wait until prices drop further and buy something you can truly afford with a 30-year fixed-rate conventional mortgage. Make the 15-year amortization payment "option" when you have the extra money.
 
This is the “normal” reasons for getting an I/O option. They are designed for those who work on a commission basis, or have substantial periodic bonuses, who can make larger lump-sum payments. There is nothing wrong with these types of loan options, as long as you are the type of person where this option is suitable. For most people, it is not.
 
Theoretically, all of these exotic loans have a place and an appropriate end user. It is my observation it can be handled by about 2% of the general population, not the 80% which currently use them.
 
I think the following would be better: more than 20% down, 28% or less DTI, fixed rate, 15 yr principal and interest with no payment options.
 
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