Interest-only mortgages are roaring back to life after doing some much harm to so many. But is this kind of loan automatically a bad idea?
I remember getting the first calls about 15 years ago when interest-only loans started being offered. It was like callers wanted me to condone their decision to get an interest-only loan, and they argued with me when I didn't.
Now I'm seeing ads and the interest-only loan is being heavily marketed again, targeted mostly at higher income homebuyers. So is it automatically going to be a disaster for you?
Well, if you're doing it to afford more house than you could otherwise, it will be a total disaster. There's not a circumstance where doing it this way is a good idea. Period.
The only exception to when it may be OK is for people who own their own businesses and have cycles of income over the year. Sometimes you have good cash flow, and you need to use that time and have the discipline to pay down principal.
If, on the other hand, you know you'll just make minimum payments, and you have that clock ticking until interest only ends, and then you have to catch up on the principal…and you're just not going to make those additional principal payments…well, don't give in to the lure!
Most of the time, it is going to be dynamite.
For further reading:
- Can you still get a deal on a home?
- Save thousands on a mortgage or refinance
- First-time homebuyer guide