A co-worker is in the process of buying a house and is financing 80% of it (20% is financed through another loan). He claims the company is giving him a loan of 0.95% (plus 2 points) fixed rate.
Neither he, nor I, nor anyone else with in earshot can believe this is true. It originally sounded like SCAM!..RUN AWAY. But he has checked out the company, talked it over with the real estate agent and it seems to be true.
The company seems pretty professional, is not listed as evil by the better business bureau.
The guy has been telling the finance company “I don’t believe it” for about a week; but it seriously appears to be true.
I’m fully expecting a conversation like “Oh, you thought it was 0.95%…no no no; I’ts really XXXX, sorry for the misunderstanding…to bad you already signed.”
What potentially is the “catch” to this situation? (before I meet with them to look into refinancing)
There’s more to a loan than just the interest rate. What about the other terms? For example, length of loan, balloon payments, on-going changes to the rate, pre-payment penalties, etc. Is it .95% per year? For how many years? But you are right … there’s no free lunch when you want to use someone else’s money.
Is this a fixed rate or adjustable rate loan? If it’s adjustable, expect it to go up after a year or less. Also, I have seen loan companies advertise low rates as an “interest only” loan, where you pay nothing on the principle, then the whole amount is due at the end. CHECK OUT THE FINE PRINT.
It’s an “interest only” mortgage, they’re all the rage right now on drive-time radio. Local DJ tells you that you can “free up cash” and “save thousands” every year. And they’re right, for 3-5 years that is. Then then entire balance comes due. Sure, you can get a conventional loan before that happens, assuming the market hasn’t gone down in the meantime.
If it has, you’re looking at >100% LTV and those interest rates don’t look so good now do they? They’re hoping that you’ll do anything to avoid forclosure on “your home”, and agree to the new terms which are most certainly not in your favor.
That he’s buying with nothing down (1 loan at 80%, 1 loan at 20%) is the giveaway. If the market corrects he’ll still be on the hook for the currently-higher debt, refinanced at the years-later higher interest rate.
I’d guess it’s either a scam or the guy has his details wrong or is leaving out information. If not, I’d love to hear about a legit company that markets this loan!
Cynical, the OP said it was fixed - I thought all interest-onlies were ARMs?
There are interest-only 1-month ARMs at 0.95%; why someone would get such a sucky loan is a mystery to me, but they must be out there. Here’s one such I just googled: "Chart reflects an example of a 1-month MTA Option ARM with a start rate of 0.95% (APR 4.8%). After a 1 month period, interest rate and APR may increase or decrease; however, the minimum payment is guaranteed for the 1st 5 years of the loan with a 7.5% payment cap annually. First lien mortgages only. Rate adjustment and payment caps may result in deferred interest. Interest rates/APR may be higher than when these costs are paid by borrower. The expressed rate could change or not be available at commitment or closing. "
Even though the loan papers he showed me have the “fixed-rate” box checked; I wouldn’t be suprised if the loan dude will say “Oops, that shouldn’t be checked…its really an adjustable rate”.
How can I tell for sure it is an “interest only” loan? What will it say in the paperwork? Will it clearly say somewhere that after X years $200K is due NOW!?
BTW the paper work that my co-worker showed me clearly that the 130K loan would cost him a total of ~ 160K over the life of the loan.
I’ve heard a couple of ads for “fixed interest only” mortages, I haven’t bothered researching them because paying little or no principle is a great way to ruin your credit years down the road. I would have thought people had learned this from credit cards but I guess not. It may very well be similiar to the “prime lock” rates for credit cards, ie: locked to a variable rate. Deceptive advertising? Hmm…
At any rate, it’s not the current interest rate they care about, it’s getting you to sign the promisary note that says “I owe four hundred thousand” (or whatever) and time it so the interest rates are much higher when the balloon comes due. Then they get the best of both worlds, a large balance at a high rate. Likewise, the real estate agent gets her 6% of the current high value.
Having lived in the home for a few years he’s more likely to be emotionally invested in it. He won’t be financially invested, most likely he’ll be upside down on it. Everyone makes out except the poor chump who’s left working 3 jobs to pay for his McMansion.
Just because a loan is interest only doesn’t mean you can pay the minimum payment only. My 30 year, 20% loan on my 100% financing is an interest-only HELOC, but I pay it on a 10-year amortization.
If I could get a 0.95% rate on my first, even with a balloon, I’d sure as hell do it. And I’d still pay the same as I am now just drive down the principle. If we have some crisis where interest is 1970’s levels again, well then I’ll have more to worry about than keeping my house.
You’ll only be upside down if you actually pay only the interest, and/or you bought in a non-optimal location.
Is “the company” he’s talking about also the party that’s selling him the house? If so, it’s possible that they’re offering such financing because the overall transaction will still be profitable for them (which, if true, would suggest to me that your co-worker is overpaying for the house).
Barring that possibility, the offer seems too good to be true, and then some. My guess for most-likely-misunderstanding is that the 0.95% rate is only temporary, and then it becomes a variable-rate loan.
Firsts to answer why someone wants an adjustable at .95% that goes up right away… because they need the lowest possible monthly payment to get apporval, as most lenders will not allow borrowers to exceed 28-32% gross income and 40% total monthly debt to gross income.
We call these teaser rates in tne biz (real estate attorney here).
Why get an interest only loan? The avaerage American moves every 7 years. 30 year home loans are front loaded, so after 7 years you have only knocked off 10% or so of the principal. So paying interest only helps with cash flow, allows you to hopefully invest the extra money in something that yields higher than the mortgage rate after taxes (2-3%).