Finally, a lunch break. Yes, it has been one of those days.
This is a follow-up musing to my last one, based on the recent action of the Fed to raise interest rates. Although the past few raises have not triggered an increase in mortgage rates, there still is some anticipation that there will be an effect… if not now, then soon.
So, I’d like your opinion on the various loan products out there. I’ve always grown up with the 30-year fixed, but would accept an adjustable rate mortage (ARM) if it was tied to the right index, had the right cap, and the right increase period and increase cap per period. But that’s old school, and there’s a lot more product out there. For example, on top of your normal fixed and adjustable rates, there are interest-only loans, loans with negative amortization, and all sorts of wierd and exotic beasts. Are any of these new types worth exploring?
Unless you need it due to your financial situation, I don’t see any upside to an interest-only loan or any of the special gizmos, especially negative amortization:
- Lots of folks seem to like the interest only. That would maximize and regularize your tax deductions, but depend on the rising market to build equity. I’d rather ensure the equity growth. I saw the last downturn, and it was adding the additional equity that would permit one to refinance. You could be stuck not being able to re-fi after a year with interest only. If you don’t need it to get into the house, I say don’t do it.
- Neg-amort loans might be good for a first-time buyer, especially in the LA market, as it allows one to get into a property that will appreciate better. However, just as with credit cards, they would require the discipline to either pay the same as an interest-only loan (which wouldn’t decrease the principle at least), or pay as fully amortized (decreasing principle). The neg-amort would be used simply to qualify for the larger loan, give wiggle room if needed on the payment, with a goal of bringing in extra income to cover what a realistic payment should be.
So, my thinking is that if you can afford it, the traditional is best. But what are your thoughts on the matter? I know that the right product does depend on your financial situation, but a public forum such as this is not the place for such specifics, so do keep the discussion general.
