Interest-Only Mortgage

UMPC News

Buyers in housing markets with double-digit rates of appreciation may find ARMs with an "interest-only" option especially enticing. But financial planner Jim Cristee, calls this "just another game at the casino table."

With this option, you repay interest only-no principal-until the end of the fixed-rate period, which could be five years. On a $250,000 mortgage at 5%, the interest-only payment over the first five years would be about $1,000 a month, or $340 less per month than if you repaid the interest and principal.

The rationale for this option? To make the monthly payment even more affordable. In theory, the tiny amount of principal that you would repay with a regular mortgage would be more than offset by the property's rising appreciation. The goal is to sell or refinance before the payment adjusts to its full amount.

Before you bite, consider the worst-case scenario: What if you're still in the house when the adjustment comes? "If the interest rate goes up, you really have a heart attack at year six," says Cristee. "It's a double whammy."

And what if housing prices fall? You may find yourself "upside down," owing more on the balance of the loan than its current market value and unable to sell without bringing cash to the closing table.