House Flipping

in flipping houses, most people took short term interest only loans to keep the payments low thinking the housing market will allow for the equity in the house to grow faster, and selling in a short period of time

In today’s market not the best bet based on the market swing, best bet is to use your own credit, to get long term fix, though if inflation seems in check the feds should stop raising rates for now, then short term variable might be a option, if feds stop raising the overnight lending rate

If you can not get a good fix rate on either house you are buying or or own home, then hope you get a steal of a house get variable interest only and hope you can sell the house within a year but in to days market the house to flip would have to be a steal in one way or another

In an interest-only mortgage, you pay nothing toward your principal debt for the first few years. On a $200,000 mortgage, for instance, a traditional 30-year-fixed mortgage at 6% might run you $1,500 a month, including principal, interest, real estate taxes, and insurance. Remove principal from the equation, and the payments drop to $1,300.

If you can’t afford a $1,500 payment but $1,300 is manageable, if you plan to own the home for only a few years, or if you intend to resell it before the principal payments kick in, this arrangement can look like a great deal. But if interest rates increase, so, too, may problems. Most interest-only loans are of the “adjustable rate” variety, meaning that the 6% interest you start out paying can increase. Some of these mortgages adjust the interest rate every month.

Let’s attach a dollar figure to this phenomenon. For every 1% increase in the interest rate, the payment on our hypothetical mortgage increases by $167. All it takes is a 2% rate hike to push that $1,300 payment to well over $1,600, and perhaps beyond a homebuyer’s ability to pay. Bad situation for the homebuyer? Sure. But this also could spell trouble for lenders such as Countrywide Financial (NYSE: CFC), Wells Fargo (NYSE: WFC), J. P. Morgan Chase (NYSE: JPM), and many other banks offering this flavor of mortgage. Why? Because homebuyers using an interest-only mortgage do not build equity in their homes and so have less to lose by walking away from a house, and a mortgage, when they can no longer afford either.

If interest rates continue to rise, there’s a good chance we’ll begin to see a rise in such “walk-aways” and a consequent rise in the number of banks getting stuck with foreclosed houses they don’t necessarily want. Simultaneously, we’d expect house-price appreciation to slow or reverse, since higher interest rates make houses less affordable. Assuming that both trends hit simultaneously, as seems likely, these banks could be setting up a situation in which they find themselves in possession of a lot of houses, just as houses become harder to unload on the market. And that would spell trouble for the banks and their investors alike.