Interest-Only Mortgages

Shortest question in a long time, and I’ll probably give you a long answer. The pro is that you pay somewhat less each month and can therefore qualify for a larger mortgage than with an ordinary loan. This enables you to buy more home than you could otherwise handle. In a high-cost area it might be the only way you could buy at all. The con is that you’re not building any equity. You don’t have the enforced savings of paying down your debt. As far as I am concerned, you’re not buying the house at all, you’re just renting it. If real estate values fall in your area, you could find yourself “underwater” or “upside down” on your mortgage, owing more than you could sell the place for. If something unexpected forced a quick sale, you might have to come up with additional cash just to clear the debt. Otherwise you’d face foreclosure and a ruined credit record. In addition, many interest-only loans convert to regular amortized mortgages after a few years, re-figured for a shorter term, which could result in “payment shock”--much higher monthly charges you couldn’t handle. Before the Great Depression in the 1930s, interest-only loans were pretty much standard. The result was that when unemployment hit, millions of families still owed their whole original mortgage amount, and lost their homes. Then vacant housing just made the Depression worse.  That’s when the amortized (paid-down) mortgage as we know it today was designed, I believe, by a woman. As I heard the story, she was secretary to an economics professor who was brought to Washington as part of Roosevelt’s Brain Trust, to try solving the nation’s financial crisis. Her suggestions resulted in the first FHA-insured mortgages, part of the New Deal. They featured gradually paid-off home loans, a system so sound it was eventually adopted for other types of mortgages.