| Ask Dr. Don
Hello Dr. Don,
Here is our dilemma: We have $25,000 to put down on a $335,000 house.
Our lender is trying to talk us into an interest-only loan, and
we are not familiar with this loan type. Would this be a good loan
to get or is there some other type of loan that would best suit
We also would like to know if it is a good idea
to use the profits from the sale of our current house to pay down
the new home loan, or to upgrade the new home with some additions.
The new house will be purchased prior to the sale of our current
house so we can't use the home's equity for a down payment on the
Loan payments have two components, principal and interest. An
interest-only loan has no principal component. The $315,000 loan
balance would remain outstanding until you replaced it with conventional
financing, or the note is paid off.
With an interest-only loan, any equity you have
in the home comes from either the down payment or the home's price
appreciation. An interest-only loan will have a higher interest
rate than conventional financing with the same term because of the
increased risk to the lender. The interest expense doesn't decline
over time, so the mortgage interest deduction should stay stable
over the life of the interest-only mortgage. It's not going to be
easy to find a lender willing to loan you money for longer than
10 years on an interest-only basis.
There are times when a bridge loan makes sense.
A bridge loan is an interest-only loan that finances the new home
until the old home is sold. A bridge loan typically is written for
a six-month term but may have renewal provisions. I'm not a big
fan of bridge loans when that means that the homeowner has two mortgages
to pay. I'd only borrow using a bridge loan if I were very confident
that my current home would sell quickly.
Mortgage loans where the borrower has almost
no equity in the home are riskier and carry higher interest rates.
Lenders will require private mortgage insurance when the loan-to-value
is greater than 80 percent. After the current residence sells, you
may be able to pay down the note to where PMI no longer is required.
Unfortunately, that may mean that you don't have the money to purchase
the upgrades and additions you want. But -- you can always take
out a second mortgage to pay for the work. The trade-off is the
higher interest expense with the second mortgage vs. the PMI payments
with the first mortgage. When the house sells, your lender should
be able to help you make that decision. Or you can write back to
Sears card rates
Dear Dr. Don,
We have a Sears Premier card with an interest rate of 21.99
percent. In its weekly flyers, Sears advertises a rate of 14.99
percent to 25.99 percent for this same card. I've called customer
service several times and I've been told that anything lower than
21.99 percent is a promotional rate. I've sent a letter to them
with enclosures of the flyers showing that it's not a promotional
rate but never get a response. How can I get a rate of 14.99 percent
on my Sears card?
I pulled the Sears flyer out of the Sunday paper, and saw the
same 14.99 percent to 25.99 percent that you referred to in your
letter. So I sent Sears an e-mail asking them how they determine
what interest rate a customer will pay on a Sears Card. Sears replied
that it uses credit reports, demographic data and an overall credit
score to determine credit risk and the subsequent rate to a borrower.
The good doctor prescribes two bromides to cure
your indigestion over this matter. First, trust the company to know
its business. If it tells you that you aren't eligible for a 14.99
percent card, then you aren't eligible. Second, if you don't like
paying 22 percent interest on your purchases, either pay cash or
vote with your feet and shop where you can get a better interest
If you're using your Sears card to build a credit
history, then pay your bills on time and be careful not to run up
large balances. Working your way out of a hole you dug with a 22-percent
shovel won't be fun.
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final decisions or implementing any financial or investment strategy.
-- Posted: Dec. 3, 1999