Is An Interest-Only Mortgage Always a Bad Move?

Are interest-only loans necessarily bad?

They can be at times, and often are, under the wrong circumstances for a particular applicant. But Bob Bruss, a real estate broker and syndicated columnist, believes that in some cases, they can work out fine.

In his most recent Q & A session, he addresses the ins and outs of the interest-only mortgage — something many people around the country have gotten quite familiar with over the past few years — and not always for the best.

Q: I have around $300,000 equity in my home. At the current remaining term I owe only about $34,000 on my mortgage. Although I am a retiree and in good health, I am “only” 64, so a reverse mortgage won’t give me much because I am too young.

I have a decent retirement income, but not enough to afford to go with my friends on cruises and afford other frivolous expenses. My suggests I get a 30-year fixed-rate mortgage with “interest-only” payments for the first 10 years. There is no negative amortization, which you often warn about.

He says I can easily afford the monthly payments, even after they “adjust” in 10 years to pay off the home mortgage loan in 20 more years. My children advise against it. What do you think? Should I go ahead with it?

A: Go for it and enjoy your home equity. Your children probably know you will be spending their inheritance and (at least subconsciously) may want to discourage you from fully enjoying your retirement while you are still in good health — or they just fear interest-only mortgages out of habit.

There is nothing “all bad” with an interest-only mortgage that doesn’t have negative amortization. The mortgage option you describe sounds pretty ideal as long as you can afford the payments on your retirement income, both now and 10 years down the line (when many people don’t plan ahead for) when the monthly payment adjusts.

The type of home mortgages that get homeowners into financial trouble in a hurry are the so-called “option ARMs,” where the monthly payments are so low they don’t even take care of the interest. When that happens, the lender adds the unpaid interest to the principal, resulting in negative amortization where the borrower owes more than the original balance.

That’s what you need to watch out for.