Interest Only Home Loan?

How will she be gaining equity?

Better be sure she can sell for a profit.

Can she deduct appreciation? If so, Won't that diminish her adjusted basis once she sells it?

 

i think i'd opt for a smaller home. i have the same concerns Mulder does.

 

Thanks! I'll take that as a compliment!

 

Payment Option ARM is what she is looking at.

I'd advoid it and if you don't, read the fine print on the terms (they usually carry a severe pre-payment penalty amongst other things).

 

be able to re-sell it for a profit in a few years.

If the price goes down, the closing on the house when she sells will be quite painful.

There is usually a fairly strong market for entry level houses (ie smaller and cheaper). This type of house would reduce the risk of losing money when sold.

 

If interest rates are 2% higher than they are right now in three years the house could be worth appreciably less than it's current selling price. She could be in a position where she couldn't refinance the full amount of the no interest loan when it come due.


Just drive around the outskirts of town and look. Every open field is turning into a housing development. All of those houses will be newer than the used home she is buying now. Their probably won't be an out and out housing bust in Houston because our energy based economy but there certainly can be deflation in housing prices. Deficit spending = higher interest rates= fewer people who can afford houses=less demand=lower prices.

Houses are good investments when you consider the utility they provide,
but as speculation they are subject to the boom and busts of any other commodity.

I actually gave a house in the Woodlands away in 1984. I just signed over the note and walked away, glad I didn't have to pay on the note anymore.
It turned out the guy I gave it to was a crook who collected the first and last month's rent from an old lady and never paid the bank but that's another story. (the note was FHA insured and transferable)

 

contact this person for an opinion.

derek@elendmortgage.com

 

Hmm, I though the term "interest-only" meant that you aren't paying down the principal, and thus not building any equity. Furthermore, even if the house appreciates, I doubt it will appreciate enough to cover the cost of selling the house. I just don't see double digit appreciation in Houston like I'm seeing here in California...and even out here it's slowing down. She should go with the house she can afford.

 

Good advice. It will need to appreciate at least 6% for her to break even.
Tell her not to do it. She almost is better off renting

 

Figure closer to 8% (6% for realtor fees plus 2% for closing costs (title policies, etc.))

 

add your closing cost and property taxes and the investment doesn't seem too much like an investment any more.


Example.

You buy a 200K house.

You have to pay 2 percent for closing costs initially plus the cost of movin.

+$5000

You have to pay property taxes over 3 years

+ $18,000 (assuming a 3% tax rate)

you have to pay a realtor plus closing cost to sell the house

+ $16,000 (assuming its 6%)

you get some tax saving over 3 years

-$18,0000 ( assuming you can already itemize before the house and you're in the 25 percent tax bracket and you make about 2k monthly including mortgage, property tax, insurance)

Your house would have to appreciate $21,000 in 3 years just to break even, Where as if you would have moved into a $1000/month apartment, you would save $400 a month from the mortgage payment which would net you about 15K over the 3 years. In other words the house would have to appreciate $36,000 to break even with your opportunity cost.

 

Adjustable Rate Mortgages are what most economists were worried about in a speculator's market.

The interest rate is steadily rising with some early year predictions saying mortgage rate will hit 7%. Don't get screwed from the ARMs attractive low down payment as the housing market is showing signs of cooling off.

 

Agreed, plus what codell said...This is how everyone is affording all these big houses and when it appreciates, you can't afford the increase in Property Taxes...Live beneath your means...

 

another suggestion: hire o'connor and associates to file a tax protest for you every year. i was amazed at what they were able to do for me last year.