Secrets Behind Interest Only Loans: Lower Payments, But Are They Right for You?Written by Tony Baricevic
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Some people put savings in payment towards common investments like stocks, bonds or mutual funds, hoping to earn money on payments that they would have normally paid towards principal. People using this strategy on a primary residence would need to earn a higher rate of return than interest that is being charged on loan to stay ahead. This is because they would not be paying down loan and their capital gains on other investment may be taxed on withdrawal, so they would realize much less profit. Not to mention if they took a ‘loss' on that investment, they would be paying more interest on their loan AND realizing a loss of their diverted investment capital. Another important distinction is if they chose not to pay any principal or failed to invest payment savings successfully when Interest Only option period expired. Their payment would greatly increase unless they refinanced loan at prevailing future interest rates. In addition, having a higher loan to value ratio makes it more challenging to refinance. Remember that Interest Only option is just that, an option, and can be treated that way, only making lower payments in times of hardship. A nice feature if it doesn't come at considerable added cost. Experienced investors can also leverage lower payments to improve earnings. In summary Interest Only loans are all about cash flow, and flexibility. The new available fixed rate terms give them a welcome predictability, making it even easier for more people to qualify for a loan and own their very own home. Now you are "in know". * Negative Amortization is when a loan calculates a payment on a low fixed rate but uses an adjusting indexed rate to calculate interest due. If this adjusting indexed rate payment is higher than fixed payment, extra interest is added on to principal loan balance. This article courtesy of http://www.quicloan.com. You may freely reprint this article on your website or in your newsletter provided this courtesy notice and author name and URL remain intact.
Tony Baricevic is a Senior Loan Officer with Amerimac First Mortgage in Los Gatos, CA. His focus is on objective loan education and information. For a copy of The Top 10 Mistakes when Buying/Refinancing a Home go to http://www.quicloan.com
| | How to tell if a property is overvaluedWritten by Mike McVey
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Is it complicated? No. It's simple. If price of a house is 12 times or less annual rental income you can achieve from that house, then it is a 'buy'. A good investment in other words. These levels were last seen in UK almost 5 years ago, and in US over 3 years ago. Conversely, if price of a house is 20 times or more annual rental income you can achieve on that house, then it is a definite 'sell'. As an example, say you want to buy a house priced at $100,000. You know that house currently rents for $10,000 a year. According to calculation, house will be a 'good buy' up to 12 x $10k, i.e. $120,000 , so in this case yes, it is worth buying now, as you are likely to both cover mortgage costs with rent, or even make a small profit on it, and also benefit from any coming capital growth. Another example, you own a house that rents out at $20,000 a year in a swanky neighborhood. You notice that identical houses in street are up for sale (and selling!) at over $500,000. Guess what - it's time to sell - house is over 20 times more expensive than annual rent! Chances of any more capital appreciation in this market are slim, and you can actually make a far better return by simply selling house and putting proceeds into an interest bearing bank account. Interestingly, most amateur investors tend to hold property rather past this point, and end up unable to sell as market tips to downside. If figure of annual rent to price is already way past 20, you may be too late to sell easily. Not as complicated as it seems, is it? Just remember '12 - 20' rule, and you should be able to enter an exit house market at very best times.
Mike McVey writes exclusively for www.mortgagedown.com the bext site for free mortgage advice
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