And it’s as bad as it sounds.
A refresher: Interest-only mortgages are the type of mortgage where you only make payments toward the interest, not toward the principle. What this does then is prevents you from gaining equity in your home, unless your home appreciates in value. No appreciation equals big problems.
Lest we forget, these loans were a big part of the financial meltdown in 2008.
Though now they’ve come back in a slightly different form. Jumbo loans. You can get an interest-only loan, but only if the loan is more than $417,000. Oh, and they’ve also added other safe guards including the loanee must have a credit score of 720 and be able to put down 25%.
So why would someone get this kind of loan? Especially someone with a decent credit score and enough cash to put 25% down on a jumbo loan? There are a couple of reasons people justify this type of loan. For example, cash flow. Let’s say your compensation is set up where you get a big bonus at the end of each year. To keep cash flow up during the year you’d make interest-only payments on your mortgage and when you received your bonus you’d dump it into your principal. Another common justification is the housing market. If your house is in a market that always goes up, you may believe your home will naturally build equity and you don’t need to contribute to it.
You can believe whatever you want, but I believe interest-only loans are generally a very bad idea. My simple advice? Avoid ’em.
Peter Dunn a.k.a. Pete the Planner® is an award-winning financial mind and a former comedian. He’s a USA TODAY columnist, author of ten books, and is the host of the popular radio show and podcast, The Pete the Planner Show. Pete is considered one of the foremost experts on financial wellness in the world, but he’s just as likely to talk your ear off about bass fishing.
Even those “justifications” are insane. The fact that people do this makes me sad.