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I need advice from people with more knowledge than I-
I have never had a home before so when we got into the first mortgage I did not understand it all-
We have an 80/20
The 80 is an adjustable rate balloon. So not only does the rate increase, but the note comes due in 30 years. That would mean 15 years worth of payments at the end of that term
Refinancing this loan before 24 months carries a 6 month interest penalty.
The 20 is a 30 year fixed- just at a higher rate. Can do a re-fi anytime, no penalty.
We also have a small home improvement loan for the new windows we put in. 7 years, no penalty for pre-payment.
I have been working with someone on a re-fi- I wanted to get money out of it (if possible) to consolidate debt but it looks like a no go- here is what she came back with.
30 year fixed
interest only payments $958.00 (for 10 years)
includes the 6 month penalty on the old loan- new loan has no penalty for prepayment
fixed for 7 years
interest only $394
includes home improvement loan (and works as a line of credit, I can pay it off and re-draw from it)
$1598.00 new payment
$1754.00 old payment
$156 per month savings
I told a friend at work whose husband works (or used to) in the industry and she said an interest only is bad. That I will lose (or not gain) equity in my home and that when the interest only ends I will get bit with a huge change in payments. She said it is good for short term homes, but not for one you will live in for a long time.
I know nothing about them-and I am more baffled now than ever.
Is this going from bad to just slightly less bad- or is it a step in the right direction?
I can afford my current loan- this is not about money problems, just trying to get out of a bad loan that will be nasty in the future.
I understand now that with interest only I gain no equity-but is that a bad thing right now? Do I want to wait, or try someone else? How many people can I have look at this without hurting my credit?
I would continue to gain equity- by paying down or home gaining value.
I paid $189k- homes are selling in my area for $223k
At the end of the 10 years (interest only term) my loan would be reamortized over the remaining 20 years. So let's say I never paid anything but interest and reached 10 years- my payment would change to $1284 (only around $300 difference)- but only if I don't re-fi or pay on the principal.
This won't adjust on me-rate locked for 30 years. Equity in the home at 95% financing.
A quickie answer from him (must not have time right now for detailed)
Real quick, I assume she has not passed her pre-pay period yet. If that is the case she should just wait instead of biting the hook of a better rate. It is not guaranteed until it passes underwriting anyway so whatever she has been quoted are not the final numbers and rates.
When re-financing occurs, there will probably be a re-appraisal. Your Property Taxes will then be assessed on what the property is worth now, not what it was worth at time of purchase. If your property taxes are factored into your monthly mortgage payments, this may result in higher monthly property tax payments. This, of course is dependant upon where you live, however. Good Luck--mortgage stuff is sometimes purposely inscrutable.
Just my personal opinion, I think interest only loans are a bad idea. You are correct in assuming that you gain no equity in your home with an interest only loan, since equity refers to the part of your home you actually own as oppossed to the interest you pay on the rest of it. If you plan on selling the house and moving in a few years, you might be ok. However, say in 5 or 6 years you need a new roof or want to put in a pool, or you basically just need some money. On an interest only loan, you don't have the ability to use the equity you have accrued to make home improvements.
If you can affored payments on a fixed loan, I would go with that. Interest only is too scary a thought for me personally. I don't know how you could ever own your house with that kind of loan.
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I would only go interest only for the following reasons:
1. You know the home prices will go up.
2. You are not going to be in the home more than 5 years.
3. The house payment will go up almost $787.00 per month at the end of 10 years as that is how much needs to be paid back over 20 years to cover the principal. So don't take this loan unless you plan on moving soon.
When re-financing occurs, there will probably be a re-appraisal. Your Property Taxes will then be assessed on what the property is worth now, not what it was worth at time of purchase.
I work in appraisals so I can totally vouch for that. And the market is in a really bad state right now. I mean really bad. Values are not what they used to be. The trend I'm seeing is anywhere from $50k-$100k less than what things were a couple years ago... sometimes more. So many loans have been getting cancelled and several mortgage companies have been hit so bad they've had to shut their doors. Nobody knows how long this is going to last either. The last 2 days at my work have been almost totally dead. We're getting appraisal orders but not many.
I'm glad your husband mentioned that one first. That's the most important. And in this market that's not a given. In fact, as inventory goes up prices are going to come down. In San Diego the median sale price for a single family home is down $46,000 from February 2006.
Equity also goes up with home appreciation, improvements in the house, $$ other homes are going for- not just what I pay into it.
In today's real estate market, home improvements are generally not going to be enough to keep up with the deflation in prices.
I work in foreclosures. My company buys, fixes, and resells foreclosure homes. And most of the sales we're seeing these days come from people who bought in the last couple of years with no money down, 80/20, interest only, or other exotic loan types. These things are bad news.
If you can refi to a 30 year fixed, you should do it. Trying to juggle strange loan types in a falling market isn't going to be fun.