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Borrower Question: Interest Only Or Fully Amortizing Loan? - YouTube
Channel: Michael Hausam
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Well hi there, I'm Michel Hausam of The
Hausam Group at Vista Pacific Realty.
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So yesterday, literally yesterday, I closed
a transaction representing buyers that
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got the type of loan that hasn't been
popular in quite a few years; I was
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actually kind of surprised by it, but
thinking about it further, I thought it
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would be a really good topic for a video;
what they ended up getting was an
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interest-only mortgage; so let's talk
about it; the typical mortgage loan
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nowadays has a fully amortized loan
payment; that means there are two parts
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to the loan payment; the first part is
the interest and the second part is the
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principle reduction; now the term for the
typical principal reduction loan is 30
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years, your basic 30-year fixed-rate loan,
although sometimes there are 20 year or
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15 year or even 10 year loans that are
available; an interest-only loan payment
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has one part - you just pay the interest
that's due, so obviously if there's no
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principal portion of the payment, it's
just interest; it's a much lower monthly
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payment and that's exactly why these
guys made that decision; it was a lower
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monthly payment and what's wrong with
that? A lower monthly payment how could
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you go wrong? well let's take a look at
their specific situation and the numbers
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that they were looking at and see if we
can come up with some of the thinking
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that caused them to make this decision
and to see if it might be the right
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decision for you; so for them it was a
$750,000 mortgage loan that they were
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looking at; now on a 30-year fixed-rate
loan today it's at three and a quarter
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percent; that's a monthly payment of
three thousand two hundred and sixty
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four dollars and five cents; now a
10-year interest-only mortgage, meaning
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it's an adjustable that's fixed for the
first ten years but the payment is only
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based on the interest, is AT three
point six to five percent, which is
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twenty two hundred and sixty-five
dollars and 63 cents a month; that's a
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monthly payment difference of nine
ninety eight dollars and forty three
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cents; so wait a sec they got a loan
there was almost a thousand dollars a
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month less and monthly payment? what is
there to think about,
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right? well actually there are three
specific things to think about before
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looking at an interest-only mortgage and
let's take a look at those three things;
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number one is the interest rates
themselves; so first of all an interest
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only loan is considered a non-conforming
product whether you're getting a jumbo
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loan size or a standard loan sized
they're not very popular, so an
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interest-only loan is always going to
have a much higher rate of interest
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regardless of your credit score; so for
these guys on their seven hundred and
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fifty thousand dollar mortgage, that was
over twenty eight hundred dollars a year
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more an interest that they'd be paying;
so that's the first thing to think about;
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the second thing to think about is your
loan balance; so obviously if every
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single month a little bit of money goes
to principal that is going to have a
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lower balance over time; so I did the
math an on a seven hundred and fifty
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thousand dollar loan at three and a
quarter percent; amortizing over thirty
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years at the end of five years you'll
have paid off almost eighty two thousand
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dollars; all right now the monthly
payment was a thousand dollars less
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meaning over five years they would have
saved sixty thousand dollars so
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interestingly, the folks that take the
fully amortizing loan, sixty thousand
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dollars more in monthly payment ends up
to be almost eighty two thousand dollars
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and lower principal balance; meaning
twenty two thousand dollars over the
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course of those five years because what
happens is on the fully amortizing loan
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you make a payment the balance goes down;
you make a payment the balance goes down;
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you make a payment and the balance goes
down; so the interest that accrues every
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month is based upon an ever decreasing - I
have to think about that for a second - an
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ever-decreasing mortgage loan balance ; so
more and
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more and more of your money goes to
principal and less and less and less
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goes to interest; on the interest only
loan the mortgage balance stays the same,
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so the interest stays the same, so that's
almost twenty-one thousand dollars more
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in equity on top of the sixty thousand
dollars of equity; so mortgage loan
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balance over time is another thing that
you have to think about; the third thing
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to consider are the loan qualifications;
interestingly for the typical
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interest-only loan, the rate and payment
at which you qualify is actually much
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higher than on a standard 30-year
fixed-rate loan, so there could be
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circumstances where somebody using these
same numbers they could actually qualify
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and get an approved for a three and a
quarter percent seven hundred and fifty
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thousand dollar mortgage, but they
actually wouldn't get qualified for the
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one thousand dollar-a-month lower
monthly payment; so you've got to think
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about the qualifications; they're
actually tougher to get; so all in, what's
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the better way to go? if you're just
focusing on monthly payment and nothing
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else, it's obvious: the interest only
loan is the better way to go; but soon as
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you add in the annual interest charges,
the principal reduction over time, and
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whether or not you can even get that
loan, the decision becomes far less clear;
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generally speaking; if you're going to be
in a house two or three years - no more
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than that - the interest only loan might
be the better way to go; but if you're
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gonna be in a house for five six or
longer years, absolutely no question
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about it, the 30-year fixed-rate loan or
a shorter term is the better way to go;
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now if you've got other mortgage
questions I'd be happy to answer them;
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you can contact me; also if you're
interested in talking about selling your
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home or buying a home, I have a very
specific system that I use for each of
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those scenarios as well; You can call me
my number's 949.413.23
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71. You you can also email me -
[email protected]. Thanks so
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much and have a great day!
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