Are most of you guys going for a Principal and Interest (P+I) ARM instead of an interest only ARM as your primary mortgage option? Everyone writes that the interest only ARM is risky since your mortgage may not have moved lower at the end of the loan given you are only paying interest every month and also because rates will jump at the end of the loan. But from a monthly cash flow perspective this interest only ARM can make a home more affordable and be lower than a P+I ARM by $300-$600 a month. And if one has the discipline to pay down the principal say once every 6 months (when the bulk funds are available thru bonus etc.) by the amount of the principal you would have paid every month, one should be in good shape, right? Moreover, we already have some equity built into the place since we got a 10-15% discount by buying early and so the property is already higher and we have a margin on the place so it's not like we will be left with the same mortgage as the home price when we decide to sell. So i believe i may go with the interest only ARM option. thoughts on the subject?

What about 80-10-10 second loan optinos, specifically the HELOC vs. Home Equity Loan? Advtg. of one vs. the other? Which are you gravitating towards? Fixed rate home equity loan may make sense since rates are fixed for the life of the loan while HELOC rates fluctuate and likely go up. So if rates for both types are close, home equity loan may make more sense, agreed (unless you want the flexibility of using the HELOC to borrow against for home improvements etc)?

I hate to rain on your parade, but I'm not going to mince words. Much of your logic is exactly what is causing people to already lose their homes. While certainly not the WSJ or a trade journal, Good Morning America already featured a piece this morning on the fact that many houses are going into foreclosure, people can't afford their adjusted mortgage rates, and home values are dropping. (And this is in the mainstream media - which means things are already happening.) All these people losing their homes had the same rationale as you. Be very careful. If you cannot afford your home with a conventional mortgage now, you plain old can't afford it. (If you can afford the rate fluctuations or are a proven saver, that's different.)

Problems with your argument:
1) If you are looking at things from a monthly cash flow perspective, you're going to get trounced. This is the perspective people take when they pay the minimum balance on their credit cards. They think they've got it down, but paying off their cards takes forever, and they pay loads in interest. You may have more cash flow in a given month, but long-term you end up paying much more. You need a long-term focus.

2) If you think you are so disciplined as to pay off principle every 6 months, why don't you just do it in advance? A lot of people can't save enough to do this. Things come up, someone decides on a vacation, etc. You already indicated you are looking at things from a monthly perspective. Do you think this mindset will allow you to save up for a 6 month pay down? Doubtful (unless you get very big bonuses). How much of a downpayment do you have? That might give you a taste of whether you can do this.

3) If you must RELY on the perceived equity on your apartment CURRENTLY, you cannot afford the apartment. Or - you can go for it and risk a loss (or risk being stuck in your place when it is worth less than what you paid) if prices drop. All over America they are dropping. Gawd forbid it happens here, but that's what everyone says, until it happens to them. This may have been good thinking 2 or 3 years ago, but the peak is past. This thinking is outdated, and you should change it before you get burned.

I'm sorry to be such a naysayer. If you want to risk things, go right ahead. But it's utterly foolish to do so at this point in time, in my opinion. I have nothing invested in your decision - so consider my opinions above to be fairly objective. You can't listen to folks who also got your loan type - they will make you feel like you're making the right decision, if only to justify their own. Mortgage lenders won't help you either, since they stand to make $ from you. Try to find an objective professional opinion before jumping in.

To the first poster, I think interest only in not bad if year end bonus is big for you.

I too am not going to mince words. Interest only is about the dumbest thing that you can do. People use them when they are uneducated and buying more house than they can afford. It's a trap that will eventually grab hold of you. And to bank on having currently built up 15% equity in SC is an illusion.

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I disagree. For a lot of people with large year end bonus interest only works out cheaper provided you are disciplined to pay off principal every year.

how big is big - wall street bonuses of 100%? my bonus is 15% and if i can use this to pay the yrly principal portion of the ARM in 1 or 2 yrly installments i should be fine, no?

i'm #1 again. thanks for your feedback. #2 assuming the market doesn't tank, i was planning to sell before my 7 year ARM ends so foreclosure situation you defined is not applicable

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i don't know the details of your situation but with 15% bonus I would stay away from interest only - with 100% and more I will consider it.

"i'm #1 again. thanks for your feedback. #2 assuming the market doesn't tank, i was planning to sell before my 7 year ARM ends so foreclosure situation you defined is not applicable"

This is #2 again. I have a family member who purchased an apartment, intending to move. Then home values dropped, and if he was going to sell, it would have been at a major loss. So he was stuck.

There is a very real possibility that home prices will drop in the near future. If you can afford to pay your mortgage once your ARM re-sets, you may be OK. But remember that we are still at historical lows interest-wise - interest rates could get really high.

Think of the worst-case scenario. If you can afford that, then go ahead with your IO loan. I still think it's a VERY bad idea, but you seem adamant on doing so. Best of luck.

So I guess a 0 down (100% financing), Interest Only, 5 YR ARM 80-20 loan with a seller's concession that my friend was considering for a property in Journal Square is a terrible idea for this market, right?

Oh yeah - no year end bonuses!