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Top Tips: Interest-Only Mortgage

Aired September 05, 2003 - 10:17   ET

THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.

THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.


DARYN KAGAN, CNN ANCHOR: Today's top five money picks pick up where we left off yesterday with finding the right mortgage. The latest twist is interest-only mortgage. It's not for everybody, but this type of house payment can be perfect for certain buyers.
CNNfn personal finance editor, Gerri Willis, explains more about this in today's tips.

We're very interested in what you have to say. Gerri -- good morning.

GERRI WILLIS, CNNFN PERSONAL FINANCE EDITOR: Good morning, Daryn. Good to see you.

KAGAN: Let's go ahead and get...

WILLIS: Well, we're looking...

KAGAN: Yes, the No. 1 tip, understand the details.

WILLIS: That's right. You know, interest-only mortgages are exactly what they sound like. You pay only interest in the first few years of the loan. But you want to pay attention to the details, because guess what? These rates reset in the first years of the loan every single month. So, if you're in a rising-rate environment, you could see your interest rates just go straight up with rates generally.

KAGAN: Gerri, I could jump in there, because I have an interest- only mortgage, and it resets every six months, not every month.

WILLIS: Way to negotiate that, Daryn.

KAGAN: Oh, OK. I didn't work that hard. That's just what I have. OK, consider the long-term consequences.

WILLIS: Yes, I think a lot of people don't realize that, you know, five years, seven years down the road, you're going to start paying principal all of a sudden, and it can come as a shock to you. You'll find your monthly payments can go up by -- you could be paying twice as much as you were paying in the interest-only segment of the loan. A lot of people don't hold onto these loans for a long time, so they never get to that 7-year or 10-year period where they're suddenly paying principal as well. But keep in mind you're going to see a ratcheting up of those costs.

And let me just add one thing to tip No. 1. Some of these loans have no caps on them. So, if you are being reset every month or every six months, you may find that there is no cap on that rate. It can just keep climbing.

KAGAN: Or, as in the case though with me, it's actually just continued to go down since I've had it. So, that also has kind of worked out.

Your next tip, make sure the fit is right. I think the No. 1 question you have to ask yourself: How long are you going to be in this home?

WILLIS: That's right. That's very important. Also, we find that a lot of people who use these loans are really wealthy. They want to use that money that they'd normally pay on principal on a loan, they're going to put it in some other kind of investment that's going to make a lot of money for them. Or they have income that's very lumpy. Somebody who gets paid a bonus at the end of the year every year that makes up a lot of their annual wages, they may use one of these loans because they have the flexibility then of only paying interest.

KAGAN: All right. Consider the alternatives.

WILLIS: A big alternative is just a simple adjustable rate loan, what we call an ARM. It can be a one-year, five-year, seven-year. But again, what you have is you have an adjustable rate at the front end of that loan, and you want to make sure that you'll probably only be in that house a short period of time to take advantage of that, because after that, that loan is going to reset.

KAGAN: And finally, don't delay your purchase.

WILLIS: Right. I think a lot of people have looked at interest rates coming up a full percentage point since the low of June, and they're thinking, I'm not going to buy a house because rates have come up so far so fast. Well, guess what? They're still at lows. The average over the last 20 years of interest rates, 8.2 percent, 8.4 percent. They're only at 6.3 percent now, so you can see, compared to history, it's a pretty good deal.

KAGAN: I know. In times like these, we can get kind of greedy, because you just want it to get lower and lower and lower.

Gerri, thank you for your tips. Have a great weekend. Appreciate it.

WILLIS: You're welcome. Thanks.

TO ORDER A VIDEO OF THIS TRANSCRIPT, PLEASE CALL 800-CNN-NEWS OR USE OUR SECURE ONLINE ORDER FORM LOCATED AT www.fdch.com.






Aired September 5, 2003 - 10:17   ET
THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.
DARYN KAGAN, CNN ANCHOR: Today's top five money picks pick up where we left off yesterday with finding the right mortgage. The latest twist is interest-only mortgage. It's not for everybody, but this type of house payment can be perfect for certain buyers.
CNNfn personal finance editor, Gerri Willis, explains more about this in today's tips.

We're very interested in what you have to say. Gerri -- good morning.

GERRI WILLIS, CNNFN PERSONAL FINANCE EDITOR: Good morning, Daryn. Good to see you.

KAGAN: Let's go ahead and get...

WILLIS: Well, we're looking...

KAGAN: Yes, the No. 1 tip, understand the details.

WILLIS: That's right. You know, interest-only mortgages are exactly what they sound like. You pay only interest in the first few years of the loan. But you want to pay attention to the details, because guess what? These rates reset in the first years of the loan every single month. So, if you're in a rising-rate environment, you could see your interest rates just go straight up with rates generally.

KAGAN: Gerri, I could jump in there, because I have an interest- only mortgage, and it resets every six months, not every month.

WILLIS: Way to negotiate that, Daryn.

KAGAN: Oh, OK. I didn't work that hard. That's just what I have. OK, consider the long-term consequences.

WILLIS: Yes, I think a lot of people don't realize that, you know, five years, seven years down the road, you're going to start paying principal all of a sudden, and it can come as a shock to you. You'll find your monthly payments can go up by -- you could be paying twice as much as you were paying in the interest-only segment of the loan. A lot of people don't hold onto these loans for a long time, so they never get to that 7-year or 10-year period where they're suddenly paying principal as well. But keep in mind you're going to see a ratcheting up of those costs.

And let me just add one thing to tip No. 1. Some of these loans have no caps on them. So, if you are being reset every month or every six months, you may find that there is no cap on that rate. It can just keep climbing.

KAGAN: Or, as in the case though with me, it's actually just continued to go down since I've had it. So, that also has kind of worked out.

Your next tip, make sure the fit is right. I think the No. 1 question you have to ask yourself: How long are you going to be in this home?

WILLIS: That's right. That's very important. Also, we find that a lot of people who use these loans are really wealthy. They want to use that money that they'd normally pay on principal on a loan, they're going to put it in some other kind of investment that's going to make a lot of money for them. Or they have income that's very lumpy. Somebody who gets paid a bonus at the end of the year every year that makes up a lot of their annual wages, they may use one of these loans because they have the flexibility then of only paying interest.

KAGAN: All right. Consider the alternatives.

WILLIS: A big alternative is just a simple adjustable rate loan, what we call an ARM. It can be a one-year, five-year, seven-year. But again, what you have is you have an adjustable rate at the front end of that loan, and you want to make sure that you'll probably only be in that house a short period of time to take advantage of that, because after that, that loan is going to reset.

KAGAN: And finally, don't delay your purchase.

WILLIS: Right. I think a lot of people have looked at interest rates coming up a full percentage point since the low of June, and they're thinking, I'm not going to buy a house because rates have come up so far so fast. Well, guess what? They're still at lows. The average over the last 20 years of interest rates, 8.2 percent, 8.4 percent. They're only at 6.3 percent now, so you can see, compared to history, it's a pretty good deal.

KAGAN: I know. In times like these, we can get kind of greedy, because you just want it to get lower and lower and lower.

Gerri, thank you for your tips. Have a great weekend. Appreciate it.

WILLIS: You're welcome. Thanks.

TO ORDER A VIDEO OF THIS TRANSCRIPT, PLEASE CALL 800-CNN-NEWS OR USE OUR SECURE ONLINE ORDER FORM LOCATED AT www.fdch.com.