Wednesday, June 8, 2011

interest only





when sam and i bought our first (and current) house we were wide-eyed, naive newlyweds. we loved the street, the idea of a renaissance movement in my hometown, easy access to the highway and the square. we loved the people that we met when we were shopping the neighborhood. there was so much history and charm.

all of these reasons still hold true for us. we could not ask for better neighbors, we even went on vacation with 2 of them! we brought matilda home from the hospital to this house, we've experienced major loss in this house, we've had hundreds of happy moments in this house. we wouldn't change what this street has meant to us for anything.

we bought at the top of the market in 2006. months in to living on our street the builder went bankrupt, we lost several neighbors to the recession, and we were stuck.

like so many other people in our same situation we fully financed with an 80/20 interest only loan. truth be told we couldn't have afforded the house otherwise at the time and we thought for sure that we would only be here for a few years (read: tiny bungalow). we are already approaching the 5 year adjustable mark for one of the loans. learn from our mistake, just say NO to interest only loans. what can we say other than it seemed like a good idea at the time. we are not alone, all of our neighbors were urged to purchase their homes the same way.

BUT there is hope. i hope.

sam went and met with a financial advisor yesterday who told him three important things:

1. that we should stop putting money in to our savings (we set up an automatic weekly withdrawal which would still be helpful in putting that money aside) and put it towards the principle. we were given the goal of $600 a month. egads, but what doing this does is it allows us to chip away at our loan and ultimately lower our interest that we're paying each month in the process.

2. to raise the percentage in sam's 401k from 10% to 15%. sam's company matches a percentage of his 401k and that's free money folks.

3. we should not take a loss and come to the table with the difference at closing. say we are upside down 50,000 (optimistic) and we paid the difference, in doing so we are ultimately sacrificing millions in the long run of what that money could be doing for us in stocks and/or savings. compounded interest is a serious thing. take this simple math for instance:

this example is from green arrow investments:

"So what exactly is compound interest? Say you have $100. You put that money in a bank that promises you a 5% annual return. After one year you will have $105 ($100 plus the $5 interest). The next year you will once again receive 5% return. However, now that your account has grown by $5, you will be getting 5% return on $105. At the end of the second year you will have $110.25 ($105 plus $5.25 interest). You have gained an additional $0.25 in added interest from the previous year."


so that's the plan. to pay off this loan until we can break even. our hope is that in the next few years the value will rise and we can keep our shirts.

12 comments:

Meg Wilson McClendon said...

Lesley,

Where did you all find your financial advisor? We're looking for one as we speak because we're trying to get our ducks in a row.

BTW, I love reading your blog every morning!

Thanks!
megan

BESOS LYNN said...

thanks for sharing this information. I hope it all works out. Its such a beautiful home.
besos,lynn

Beyond Blessed in GA said...

If you have an adjustable rate, your rate could actually go down. We were in the same boat, seriously fearing the 5 yr interest only arm we signed up for in 2006. We worried as each year passed about when that 5 yr term would come up and considered refinancing several times. We are SOOOO glad we didnt, as our rate dropped by THREE PERCENT (cut in HALF) in May. Obviously this changed our monthly payment dramatically. Here's hoping yours goes down too, increasing your paydown!!

Stacee said...

So great to finally meet you the other day! The housing market here in Atlanta is so bad. Our condo in Atlantic Station is worth 100,000 less than what we paid for it. Thankfully, we were able to rent it out. Our plan is to pay it off and have rental income from it one day in the far future. Sorry to hear that you guys are trapped too!

Kari Beth said...

we are in the same situation. i bought our house years ago (going on 6) when i was single. i was tired of throwing money away on a an apt. at the time the market was really good and i thought in 5 years i could sell the house and make a profit. unfortunatley 3 houses in our neighborhood have been foreclosed on and now the value of our house is less than what i owe on it. sucks. but its a sign of the times and something i /we will have to deal with. hoping to get enough paid off just to sell and break even. a huge lesson learned! best of luck to you guys. lots of people are in the same predicament.

Shaunna Faye said...

We bought our house 2 years ago when the market was really great for buyers. It was actually a foreclosure. We had to (and are still doing) lots to imporove it, but it's definitely ok for our small family of 3 right now. We're looking to upgrade in about 4 years. After talking to some of our neighbors, we found out that most of the houses in our neighborhood are rentals, and the rent is a few hundred dollars a month more than our mortgage payment (we got a 5% fixed rate). So, hopefully we'll be able to rent it out in a few years when we're ready to move instead of selling it. I'm loving reading about your situation. So many people are in the same boat. It's interesting to see what people are doing. Getting lots of tips!

homemade grits said...

megan-
thank you reading it every morning!!
i will get with sam and email you his name tonightish.

angela-
that's encouraging! hopefully that will work in our favor too...

stacee-
it was wonderful to meet you and baby badge! so nice talking with you and i'm so glad you were able to get your condo rented!

McMel said...

again, thank you for sharing all of this. it's so sad b\c so many people were tricked into getting interest-only loans- either b\c they couldn't afford a house any other way, or because they just didn't know any better. we bought our house in August 2007 just as the market was falling through- and while we got a regular loan, we let our neighborhood haggle us. if we had waited only 3 months, we could have saved at least $20,000 on our house. our builder also ended up crapping out shortly after and houses began emptying out. by the time my husband lost his job a lot of our neighborhood had been foreclosed on, and that's when we knew we were screwed. we put our house up for rent after he was transferred, but no one wanted to pay what we wanted for rent (and we were only charging to cover our low mortgage payment). we even tried to get a tenant in under section 8 housing, but the city of atlanta lost her paperwork and we lost our renter. we then put our house on the market and after 3 price reductions had an even lower offer. we ended up losing $87k on it that luckily our 2nd mortgage company forgave (our 1st went under during this process).

i always cringe a little when i hear friends so excited about buying their 1st house- i think people thinking owning a house is the "American Dream" and it isn't all that good for everyone.

the market will come back around- you just have to tell yourself to be content to stay put until that point!

McMel said...
This comment has been removed by the author.
PSD To XHTML said...

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Sherilyn @ Wholepromise said...

This is a very informative post!. I am in Australia and can totally relate to your financial loss. All we can do is live and learn and use that information to hopefully make better choices in the future. All i know is that i have learned a lot. All the best. Your home is beautiful by the way.

Lievebee said...

thanks for the tips! I am going to write these down.