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.


Monday, May 23, 2005

The Pros and Cons of Interest-Only Mortgages

In my last post, I talked about what interest-only mortgages were and how they worked. This post will talk about the pros and cons of using them.

Free up Money for Something Else

If the interest rate is low enough, the money "saved" by going with an I/O could be invested somewhere else. But, this only works if the money is actually invested. My hunch is that most people are getting I/Os because that is the only way they can afford their house. Eventually they will have to start paying principal.

Selling Soon After Purchase

Let's say you get an I/O for $120,000. You pay on it for 3 years and then have to move. What happens? Well, depending on the set up of your loan, you probably have not yet paid anything towards the principal. That means at the end of three years you still owe $120,000 - meaning, you don't have any equity. You won't have any money to put down on another house. And, if priced have declined, you could actually owe more money. This would not be a good situation.

There are other things to consider when deciding on the type of mortgage you want. When looking at an I/O be sure you know everything about it. I have read about some I/Os that add principal to the mortgage - meaning the amount you owe grows over time. So be sure and read all the fine print. There are mortgage brokers out there who are less than honest.

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