May 21, 2004
Time 05:00 PM - 06:00 PM
Station CNNfn National
Program Your Money

ALI VELSHI, host:

Well, we are talking about buying a home and financing it today. One type of home loan that has gained a lot of attention lately is the interest only mortgage. With one of these you can get into a home for a fraction of what it would cost using a traditional mortgage, and you can maximize your tax deductions. These loans are not for everyone.

Bob Moulton is the president of Americana Mortgage Group. He joins me now with a look. Bob, good to see you. Thanks for being with us.

Mr. BOB MOULTON (President of Americana Mortgage Group): Thank you for having me.

VELSHI: What does Americana Mortgage Group do?

Mr. MOULTON: We're residential mortgage brokers in the tri-state area, specializing in financing and refinancing one to four family homes.

VELSHI: Which means that you do do business with interest only loans?

Mr. MOULTON: Very much so.

VELSHI: What are they? I mean the obvious answer is that they......you take a mortgage, and you only pay the interest for the life of the loan?

Mr. MOULTON: For the life of the loan. It depends on the term of the loan. I mean interest rates went up about 100 bases points in the last two months or so.

VELSHI: Yeah.

Mr. MOULTON: So, people who were interested in a 5.5 percent, 30 year fixed rate mortgage, are now looking at 6.25, maybe even 6.5 percent. They have a fixed payment in their mind. Interest only mortgages will lower their payments significantly, for five years, seven years, ten years, or for the life of the loan.

VELSHI: But, you're only paying interest?

Mr. MOULTON: But you're only paying interest.

VELSHI: You're never getting out from under that mortgage, that debt.

Mr. MOULTON: That's exactly right. That principle amount that you borrow, whether it's $300,000 or $400,000 will always be there, unless you prepay it. It's good for some people, but not good for everyone.

VELSHI: So, the prepaying side is interesting. If you're taking an interest only loan so that your minimum monthly obligation is small, but at some point you're going to win the lottery, inherit money, get a bonus, get a court settlement, something like that, and you're going to then take on more payments. That I can see making sense.

Mr. MOULTON: Correct. If someone who works on Wall Street, someone who's looking for a very low payment who has a low salary, or a lower than normal salary, who gets a very large bonus at the end of the year. That person can take that bonus, apply it right towards principle, and have his payments recalculate in the following month to get the lower payments. And then that year, when he's getting a low salary, he'll also have a low payment, and again he can pay it at the end of the year (Graphic listing the advantages to an interest only loan).

Same thing with a salesperson whose commissions fluctuate. If they get high commissions in one month, they can pay it then. If they don't get a high commission, they can make the minimum payment, max out their tax deduction, and still have a lower payment for interest only.

VELSHI: OK. Obviously not everybody who takes an interest only loan has thought it out that well.

Mr. MOULTON: Right. People who are on a fixed income, people who are salaried, maybe working for a large corporation---

VELSHI: When you say fixed income you mean---

Mr. MOULTON: I mean, I'm on a fixed income. I get a set amount of money every pay check. Well, you want to think about two things. You want to think about how long you're going to stay in the condo, the co-op, or the house for. If it's going to be just a short period of time, interest only can be perfect, even if you are on a fixed salary. If you're planning on staying there for a long period of time, you wouldn't want to take this product. You would probably want to take something a little bit more stable, such as a fixed rate, whether it's a third year or a fifteen year.

VELSHI: Is there anybody else you can see this being advantageous for? I mean the mortgage interest is the tax deductible part. So, if you are a renter, and you can get into an interest only loan where you're writing it off, it could be a situation where you're actually paying less money than you're renting in some markets.

Mr. MOULTON: That's exactly right. I mean a $2,000 a month rent will put you into a $300,000 mortgage. A person who likes to buy and sell properties, a person who likes to buy multiple properties, interest only is excellent. They like to leverage themselves.

VELSHI: Right.

Mr. MOULTON: They want to keep their payments down, they want to collect their rent. This is also a perfect application for a real estate investor.

VELSHI: Do you feel this is a product that's getting sold to people without them understanding it fully?

Mr. MOULTON: I like to give.... when people do business with Americana Mortgage Group, I like to make sure they understand the product. And what I do is I give them the disclosure. I have a little sales sheet that I give to them with all the bullet points, and I give them the disclosure before they get into the mortgage closing process (Graphic listing disadvantages to interest only loans).

So, it's important that they fully understand it, so there are no misunderstandings. A lot of people call and want to understand LIBOR, which is London InterBank Overnight Rate.

VELSHI: Right. I knew I was missing the overnight rate. Thank you very much.

Mr. MOULTON: There's a lot of people who call about that, but end up not wanting to take it.

VELSHI: It seems very attractive.

Mr. MOULTON: It does seem very attractive. It's a big buzz. People don't want risk.

VELSHI: Tell me how that works. You take the London Interbank Overnight rate, it's a remarkably low rate

Mr. MOULTON: You take LIBOR. You take the one month LIBOR, that's 1.1, you add a margin to it, depending on if you pay points or not. So, you take a 1.1, you add a margin of 3 percent. That puts you around 4 percent. You can have 4 percent money for five years.

VELSHI: And then what happens?

Mr. MOULTON: And then it fluctuates. You can go 2 percent in the following year, 6 percent lifetime. So, it can go as high as 10 percent. So, if you're not going to have the capitol to pay that down, or if you're still going to be at that property, and you're not going to be able to prepay the principle, you don't want that product.

VELSHI: Bob, good to see you. Thanks for being here.

Mr. MOULTON: Thank you for having me.

VELSHI: Bob Moulton, the president of Americana Mortgage group. I'm Ali Velshi, and you're watching Your Mo