Interest Only Home Equity Question
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| Wed, 01-12-2005 - 2:24pm |
Hi all! Happy Wednesday. I have a question that troubles me a bit and I thought I'd throw it out here before doing anything. About six months ago we took out a home equity loan to pay for an addition on our house. It was expensive but very worth it for both the added space and the added value of our house. By last appraisal we added more value than the cost of the loan. But here's the deal:
At the time our budget was very tight (still is) and our banker suggested since we had good credit we should do an interest only loan to keep our cash flow in good shape, pay off some other bills and pay extra when we can. Sounded good. The rate was 4.5 which I realize has now gone up to 5.2. But the payment itself is going up every single month even though we haven't used the line for months and I have been paying about $50 extra each month on top of the interest which I figured was going to the principle. So how can the amount owed be going up? Should't it be staying the same or going down?
Thanks, Jenny

Dear ColoMom:
Since the interest rate is going up, your payment will go up. You've got to call the bank and have an officer walk you through this to make sure that they haven't made a mistake. The $50 you are assuming will go to principal has to be identified as "Principal" when you make your payment. In addition, $50 is not that much as far as lowering the amount of money you owe, since the rest of your payment is interest only.
I'm going to tell you what you know already and don't want to hear: YOU'VE GOT TO GET OUT OF THE INTERST ONLY LOAN. You will be screwed in the long run. You will pay for years and years and years and the loan is NOT GETTING SMALLER, IT IS STAYING THE SAME!!!
Please, please please re-finance. Talk to a mortgage broker about having your house re-appraised with the addition and getting a new mortgage where you pay principal and interest. I highly recommend fixed rate. Even though rates have been going up, I think they are going much higher. They are still at historic lows and they won't stay this way forever.
I'd love to hear back from you. I know money is tight, I live that too. You've got to find a way. I spend so much less than I used to now that I track every penny I spend. I use MoneyPants online to do that. I love it, it's changed my financial life.