A personal finance blog dedicated discussing such topics as budgeting, asset allocation, 401K, IRA, cash flow, insurance, financial planning, portfolio management, and other areas in personal finance.


Tuesday, May 31, 2005

More on Interest-Only Mortgages

I have written a couple of posts on interest-only mortgages ( you can check them out here and here). There's also a couple of good articles on the MSN Money site.

The first article written by Jack Guttentag, Professor of Finance Emeritus at the Wharton School of the University of Pennsylvania, is an excellent article discussing what interest-only loans are why most people should avoid them. Throughout the article, he offers several tips that include some of the following:

  • Tip: Ask yourself whether you are disciplined enough to make the payment to principal when you aren't obligated to.

  • Tip: On some IOs, the payment doesn't adjust for a year, and on others it doesn't adjust until the end of the interest-only period. ASK!

  • Tip: Ask yourself whether you are comfortable with the risk that the expected higher income won't materialize.

  • And the most important tip:

  • If you don't need an interest-only mortgage to qualify for the house you want to buy, it is not the best choice.

The second article is written by Liz Pullman Weston, a frequent contributor on the MSN Money site. Although is far from encouraging the use of interest-only mortgages, she does say that you can consider one if:

  • If you’re a disciplined investor, good with money, a bit of a risk-taker and not buying more house than you can handle, an interest-only mortgage could work for you.

  • If you’re not all of those things, you probably want to stick to a more plain-vanilla mortgage.

I think this is very wise advice.

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