Expert: Ray Beggs - 10/23/2006

Question
Hi Ray,

Looks like i'll be squeezing nickels to make this home purchase at $500,000 (approx.) I have my first home with Indymac, so i'm assuming that getting this loan will be simplier and maybe cheaper if i stick with them.

They're suggesting a zero interest loan for 7 or 10 years.  I understand that you only pay interest for the first 7 years, etc. But what happens after the 7 years? Do you still owe the whole loan amount since you didn't pay any principal...plus the whole interest amount?  Or, are you now making substantially larger principal payments since you're been paying interest for 7 years?

Also, would it be better to just pay the points and get the 30 year fixed at 6.75%.  Who knows what the rate will be in 7 years?

Looking forward to hearing from you,
Wayne

Answer
Hi Wayne,

Well, you asked the $64,000 question...interest only vs. 30 year fixed. Personally, I like a 10 year fixed interest only. Remember, you can always pay the principal if you want (as long as you don't have a pre-payment penalty) so with the 10 year fixed, you have the option of paying the interest only payment every month or paying the principal and interest payment if you want. With a straight 30 year fixed, you'll always have to pay the bigger payment.

For my money, I'd go with the 10 year fixed interest only.

Just my opinion though,

Ray