Are Interest-Only Home Loans A Good Idea? (Mostly No)

Kim asks,

I was wondering what you think of interest only home loans. i trust that you know your shit so a simple “good idea” or “bad idea” reply would be enough for me to decide.

Have you been reading the papers? Most of the time, Kim, they’re a bad idea. Interest-only mortgages are a driving force behind the collapsing sub-prime lending market.

These loans work by making you pay only the interest on a loan for a fixed term. After that, you refinance, pay off the balance in full, or start paying down the principal, at which point the payments go stratospheric.

In recent years, brokers aggressively marketed interest-only home loans to downmarket customers. By hook or by crook, they convinced thousands of borrowers to only focus on the affordability of the initial payments.

The financial tool was developed mainly for executive types who earn a moderate income and then receive big bonuses. If you’re not one of those, an interest-only home loan probably isn’t for you. — BEN POPKEN

FURTHER READING: Who should get an interest-only mortgage? [Bank Rate]
(Photo: amyadoyzie)