Armchair Millionaire Community Bulletin: The Risky Business of Interest-Only Mortgages

Interest-only mortgages make sense only some of the time. If you get one when its not right for you, youre running unnecessary risks with your biggest investment.

New York, New York (PRWEB) August 16, 2005 -- Interest-only mortgages are booming in popularity for one good reason: They lower your initial monthly payments. Not only does this save you some money in the first years of the mortgage, it can enable you to get a larger mortgage (and more expensive house) than youd otherwise qualify for.

For example, a traditional 30-year, fixed rate mortgage for $300,000 with a 5.875 percent interest rate would mean a monthly payment of $1,774 per month. On the other hand, an interest-only, adjustable-rate mortgage at 5.5 percent would mean a monthly payment of just $1,375.

But despite these kinds of savings, interest-only mortgages are not the right solution for everyone. Here are both sides of the story from two members of the Armchair Millionaire community:

We chose an interest-only mortgage because we knew we would be moving in less than five years and it allowed us to continue funding our retirement accounts and college funds, while still taking advantage of the benefits of owning a home (tax write-off and appreciation)." --Mike

We do not have an interest-only mortgage. On the contrary, we worked to pay our home off early (in 15 years) so that we could be debt free as soon as possible. An interest-only mortgage seems to us would make it difficult to retire early. However, it may make sense for someone who intends to work their entire life." --Alan and Kay

An interest-only mortgage is one that gives you the option of making only interest payments on your loan for a certain period of time, typically five to seven years. After this period, it converts into a regular amortized loan for the remaining life of the mortgage. This means your monthly payment will jump, because you will now be paying interest plus principal over a shortened period of time--just 20 to 23 years, as opposed to the standard 30 years of many mortgages. Alternatively, you can refinance at this time.

As tempting as those lower initial payments may be, proceed very cautiously here. Despite their popularity, I believe that relatively few people are actually good candidates for interest-only mortgages. My guidelines will help you decide if it makes sense for you.

The Armchair Millionaires Guide to Interest-Only Mortgages

When interest-only mortgages dont make sense:
   When its the only way you can afford the house. With rapidly escalating home prices in many parts of the country, many people are finding that they only way they can afford their dream house is with an interest-only mortgage. However, this route is risky. Your monthly payments will take a big leap after a few years--bad news if youre struggling to make the payments now. While you could sell the house before youre required to begin paying principal, theres no guarantee that well still be in a hot housing market then.

When interest-only mortgages might make sense:
   When youre planning to only stay a short time. Some people are certain that theyll live in the home just for several years and want to leverage interest-only mortgages to capture the biggest potential gain in equity they can. Again, however, the housing market is a big wildcard--if prices drop, you could owe more than the home is worth when you want to sell.

   When you have an irregular income. Interest-only mortgages can make sense for some people with irregular incomes (for example, people who work on commission). They can pay the lower interest-only payments when times are lean, and then make extra payments toward principal when they are flush. However, they have to have the discipline to put that extra money against the mortgage, and not a Caribbean vacation.

   When youre sure your income will grow. If you are absolutely sure that your income will increase enough to cover the larger payments by the time the interest-only period is over, these mortgages can make sense. Most people just dont have that kind of surety in life, however.

THE BOTTOM LINE: Interest-only mortgages make sense only some of the time. If you get one when its not right for you, youre running unnecessary risks with your biggest investment.

THE ARMCHAIR MILLIONAIRE WEEKLY SURVEY: Ever cashed out your 401(k) when you changed jobs? Log on to www.armchairmillionaire.com and let us know.

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Lewis Schiff founded the Armchair Millionaire Web site in 1997. His first book, The Armchair Millionaire, was published in 2001. Schiff's newest report, "How to Know When You Are Rich," is now available at www.armchairmillionaire.com.

CONTACT INFORMATION:
Lewis Schiff
Armchair Millionaire
877-833-2823
http://www.armchairmillionaire.com

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