Mortgage Questions.

[Ma(tt)Daddy]

OK Guys, I really need some advice.

Anyone have any experience in dealing with some of the "controversial" mortgage options, i.e. an interest-only loan or and extended loan period (say 50 years vs. the traditional 30 years)?

My family and I live on the outskirts of Chicago. My wife and son and I are bursting at the seams in the flat where we presently live. Another child has always been part of the plan, but we now realize that we cannot have one in our present living conditions. We are literally tumbling over each other.

We co-own the building we live in (a two-flat) with my parents (who don't live there, but invested the orginal down-payment) and we are looking at selling the building (which has appreciated at a substantial profit over the last four years) and moving into a single-family home in Oak Park (a town literally across the block.)

Problem is, even with a substantial down payment on a modest single-family Oak Park home (basically a bungalow) the monthly payment is, for us, still unreasonable . . . UNLESS we look at an interest-only loan (yikes) or extend the loan period out to 40 or 50 years. This would essentially mean that it would be very unlikely that we would ever "pay off" the house and own it outright. Life-long debt, unless we sell it.

If we get one of those controversial loans, it would mean that we could manage the payments on a single family home that we could grow into over the years. It would also mean that we could look at homes in Oak Park which has far, far superior school systems compared to Forest Park (where we live now.) It would also almost certainly mean that we would never pay off the loan.

We can't wait too long to sell this building. The Real Estate Market is cooling off quickly, and the longer we wait, the less we'll get for it. IF we stay in this building in Forest Park, we can't have another baby, and Graham will have to survive in a less than positive educational system, including a high-school that has massive gang-related problems.

So I guess the question is whether or not we burden ourselves with lifelong debt so we can live comfortably in the prime of our families life, or do we continue to sacrifice now, not have another baby, deal with a lousy educational system so we can live better in our later years and have something to leave our kids when we die . . .

Advice? :oops:


P.S. Have a mentioned how much I hate money? I hate it. I hate money. Money sucks.

[SGTDad]

Is it possible to rent your current flat for extra income? That might be financially better than selling it for a down-payment.

[Will'sdad]

I think I'd go for one of the longer term loans rather than an interest only. The school system issue almost makes it a no-brainer, at least for me. So you get a 40 or 50 year mortgage? You can always refinance down the road when you guys are bringing in more money. Interest rates will probably go back down and maybe you can re-finance to a 30 year and keep your payments the same, knock 7 or 8 years of your mortagage? Who knows. Just my 2 cents. I'd go for it.

[Cubfan]

I like the idea of renting it out, that way you'll have a steady flow of income. While I agree that the market is cooling off, I think it's just speculation that you could only get top dollar if you sold now. If you sell when you're not in a rush and on your terms, you'll have more bargaining power and can stand your ground. By renting it out you're buying yourself time to sell on your terms, and you're gaining income, and maybe it will appreciate more.

We went thru this exact same thing a couple years ago. Wife moved in with me in Oak Park when we got engaged. Then we bought a townhouse about 4 miles due north in Galewood (northeast quadrant of harlem/north). The school district there is a hell hole so knew we'd move out when we had kids. Considered moving back to Oak Park but realized the home prices were a joke. Decided we'd rather be around family so we moved out west.

While I completely understand your desire to stay in Oak Park, it's just not feasible for everyone. Do you have a house picked out? Check out the part of town between 290 and Roosevelt. I know it's nicer up north but it's not bad down there.

[DaddyO]

I think I'd go for one of the longer term loans rather than an interest only. The school system issue almost makes it a no-brainer, at least for me. So you get a 40 or 50 year mortgage? You can always refinance down the road when you guys are bringing in more money. Interest rates will probably go back down and maybe you can re-finance to a 30 year and keep your payments the same, knock 7 or 8 years of your mortagage? Who knows. Just my 2 cents. I'd go for it.

As a former Mortgage broker I agree. The interest only loans have an interest only period that only lasts 2-10 years depending on the loan program. Interest rates are typically only locked for a very short portion of that time period if at all. With the interest only loans, LIBOR loans were the hot thing. But, as rates started to go up people started to move to the 12MAT (rates based on a 12 month moving average of US Treasury Bonds).

If you do get an interest only loan make absolutely rock solid exit strategies from either the house or the mortgage so you don't get trapped. We did 100% financing awhile back (and the appraiser inflated the value of the home). When we fell on some hard times we couldn't sell and were forced into foreclosure.

I'm sure you can do things smarter than we did. But our motivations for stretching ourselves financially to move into that home were the same as yours... room to grow into... good school system. If I could do it over I'd have stayed where we were and either sent the kids to private school or done some home schooling - possibly bought just a slightly larger/adequate place instead of "going for broke."

[Ma(tt)Daddy]

Check out the part of town between 290 and Roosevelt. I know it's nicer up north but it's not bad down there.

That's exactly where we are looking.

We also realize that we are in no real hurry (the "target date" I keep reading about as far as the housing market is concerned is 2008. We need to sell by then.)

We sold another building a year ago and had real trouble, and it was a gorgeous building. We haven't owned this building long enough that renting it out would make us any substantial profit. Both flats are only bringing in enough rent to cover the mortgage. So now real profit value yet. If we were in the city we could easily charge 1250-1300 a month to rent these flats, but in Forest Park we can only do 1000-1100 tops.

[Cubfan]

wow I just did some brief surfing on Remax and I was surprised to find a number nice looking 3 bedrooms in the low $300s. While I have no idea what your parameters are.... go for it!

[Ma(tt)Daddy]

possibly bought just a slightly larger/adequate place instead of "going for broke."

That's truly all we are doing. We are looking at going from a 2 bedroom place to a three bedroom place, with a basement or expandable attic space. Simple room for growth.

[DarthDaddy]

I currently work as Director of Quality Control for a Mortgage Software company and have seen just about every type of loan in the business. I personally am VERY conservative and we currently are on a 15 year fixed mortgage. I live in the far Northwest suburbs maybe an hour from you.

A few things that need to be considered with all the non traditional mortgages.

Like daddyO said you need to consider the What Ifs especially since many of these loans will give you little to no equity on your home early on. If you have one of these loans how difficult would it be to:
*Sell the home
*Refinance the Loan
*Get Additional Income to cover...

With many of the Interest Only programs they were originally designed for people that had income that was not a steady stream. (Commission Based) When you had enough you paid more...When you were short you paid less..

I do know a couple of the big lenders have done a few different 40 year mortgages.

There are a few FIXED 40 year loans out now

ARM (Adjustable Rate Mortgage)

40/30 or 40 due in 30. Basically the loan is amortized over 40 years, but is DUE in 30. It is a balloon type mortgage.

Now whatever you decide know what you are getting into.

Have you also thought about other areas close by? Where does your wife work in relation to good schools and housing costs?

Good Luck and feel free to email or PM me questions about different loan programs...

[Indy]

Man, the 30 year fixed we're in scared me when we committed to it, I can't imagine going 40-50 years. I see those as absolute last resorts.

As for the interest only loans, I've yet to come up with a reason why such a loan would be favorable. To me, you're just renting a house from a bank, with the added risk that you're responsible for any loss in value on the property. Your statement that you feel the market is starting to go soft sends up a warning flag on the interest only loan. If you're going to go interest only, I'd give serious consideration to just renting a house or apartment--at least that way you don't have the risk of getting upside down in a loan.

Have you given consideration to relocating? If your wife is in a profession that's in demand, it might be more cost-effective to move elsewhere. Heck, down here you can get a 2000 sq ft home in a great school district for $150k. Chicago is just so expensive, compared to the rest of the Midwest. That and the traffic kept me from moving up there.

[Jackson's Dad]

We also realize that we are in no real hurry (the "target date" I keep reading about as far as the housing market is concerned is 2008. We need to sell by then.)

I'd add, don't let the housing market dictate when you sell. Plan what it right for your family, and sell when it is right. If you end up selling for less, so be it. But rushing will only cause headaches and problems.

Dan

[woodchuck]

A 40 or 50yr fixed for full term isn't sooo bad, if you can make one extra monthly payment per year it would knock off a considerable amount of time across the life of the loan, Darth could tell you the amortization schedule of that. It's easier to get authorized for more while you own the two-family, less if after you sell, been there, and as for keeping the two-family while owning your own home, contact the local landlords association and find out how other non-owner occupied properties are doing in the area, tenant quality changes when the boss ain't around, so do quantity of 4am calls.

[SGTDad]

I don't know your neighborhood at all, but here is one more thing to consider:

Buy a more modest, more affordable house and plan for an addition later on. You can live in the house and expand as your family expands. Obviously you'll want to look for a house where an addition in 5 years would be relatively straight forward, so you'd need to closely examine the zoning and other regulations for the property. The advantage is that you can build equity in the home that can be used to help finance the addition if needed. You can also start saving a little money each month for the addition.

I think this is a much safer way to buy into an expensive neighborhood than stretching yourself financially with dicey mortgage options.

[jeffus]

Additions: Let me tell ya something about additions! :wink:

We bought our affordable little house here hoping to do that addition later on. Well, the cost of a modest addition would run us $70k to $150k. Of course, real estate prices are a joke here as well. We can't afford to execute our plans on just the wife's salary alone (it'd be very tough!). If we had an existing mortgage and added a second mortgage, there'd be absolutley no hope.

I'd advise buying the "right sized" house for your needs.

My 2 cents! :D

Good Luck!

[Weston]

We refinanced to a 15 year loan on our house when the interest rates bottomed out... I'm scared of anything longer. I just look at it this way - we might be in a small house, but in 12 years it will be completely paid off.

[SGTDad]

I concede your point Weston, but I think it's ultimately situational depending on the location, market, house, and addition costs. Buying a right-sized house you can barely afford doesn't make much sense either.

One thing to keep in mind is that you don't have to pay the mortgage exactly according to schedule. If you take a standard 30 year mortgage and send in one extra payment a year, you'll cut at least 10 years off the length of the morgage. Also, for a 40-50 year mortgage, the chances of you actually seeing that loan through to the end are pretty slim. Chances are, you'll refi at some point in the future, or move, or whatever. I think the important thing is to have a plan for contingencies and, like most financial experts recommend, have at least 6 months worth of income in a savings account in case of a job loss or other unforseen event. I think if you properly prepare and plan you can more safely take the additional risk of a bigger mortgage.

[Weston]

Definitely A LOT of variables and many buyers can't swing a 15 year especially because of location. I guess we are fortunate enough that we could.

I'm with you on sending in extra per month...On my first house when I was a bachelor I had a 30 year loan and every year I sent in $10 more a month than the previous. That upped my payment slowly (in reality just kept up with inflation) and I always had the option of not sending that extra in.

I feel much better with the 15 year knowing that the temptation isn't there to not send in the extra... our house is that much more of a priority when it comes to finances. With the added benefit of having the interest rate almost a point lower than a 30

[Ma(tt)Daddy]

Thanks for the advice guys. All taken to heart. We are having a meeting with our mortgage broker (also a friend) to find out what we can REALLY afford, and will go from there.

I never thought I'd be the type to stretch my budget in order to afford a bigger house (being the artist type and all). Then I had a kid.

One way to look at it: my wife is in no way topped out in her earning potential, and, barring some unforseen tragedy, her salary and opportunities are only going to grow. She is only 33, after all. And in 5-7 I'll be able to contribute more financially to the family budget. We might be pretty tight for awhile, but it'll get better.

:???:

[Ma(tt)Daddy]

Turns out none of this matters. We just recieved word from our mortgage broker: we can't afford s%!t.

:cry:

[Cubfan]

Turns out none of this matters. We just recieved word from our mortgage broker: we can't afford s%!t.
:cry:

go to another broker! If my sister can buy a house (she just did yesterday) than anyone can! She defaulted on a loan when she got divorced, she's putting nothing down on $170k (I know you're probably spending much more than that), so now she's going to pay PMI, over 7% on this loan, and stretched out for 40 years. I told her to make it work, because the house is in a great location and we're gonna fix it up nice and she'll be able to build some nice equity fairly fast. Now I just have to find the time to work on her house and my house....