Reasons To Embrace Interest Only Loans, Despite The Media Outcries

You can't open a newspaper without finding articles that publicly shun interest only mortgages. 

It's like the writers are dogs and the interest only products are the proverbial fire hydrant.

It dumbfounds me.  Interest only loans are not right for everyone, but they are certainly right for someone. 

Just because a person opts for an interest only mortgage, that doesn't make them "irresponsible" or careless.

I would argue the contrary.  Interest only home loans put the home owner in greater control of his mortgage.

See, every dollar that is invested in a home (as equity) can be categorized three ways:

1. Illiquid. You cannot access the funds without incurring fees. You also must wait several days or weeks before the funds are in-hand.
2. Unsafe. The more equity in a property, the more it is likely that a bank will foreclose upon you if you miss 3 consecutive payments. This is because the bank can recoup more of their original investment.
3. Non-Income Generating. Equity does not appreciate year-after-year -- a home does. Every dollar invested in a home is not earning interest if it remained in an interest-bearing account.

When these articles scream: "What will happen when the interest only mortgages begin to adjust!", I want to tell the writer: "Interest Only mortgages aren't always adjustable rate mortgages!".

For the sake of example, let's say that interest only product is an ARM. When the loan adjusts, it will only adjust higher if interest rates are higher. What gets forgotten, though, is that as interest rates increase, so do savings rates.

If you don't believe me, look in your local newspaper for bank advertisements. You'll see them touting their high interest rate CDs and savings accounts.

At INGDirect, the savings accounts are yielding 3.0% APY. Compare that to a 1.3% just 12 months ago. At NetBank, you can lock in a 5-year CD at 4.55% APY.

Interest only loans are not a bad thing. They reduce a homeowner's monthly payment and allow for cash to be invested somewhere "smarter" than equity.  When they are bad is when homeowners use them as affordability products, to help sustain a lifestyle beyond their means.

Interest only mortages are not a good match for every borrower profile, but they are right for a lot of people.  Before you buy into what the journalists say, get a second opinion from a mortgage or financial professional.

(Image courtesy: Trevor Romain)