Wealth Matters: Risky Home Loans Are Making a Comeback. Are They Right for You?

“I fell in love with the house,” Mr. John said. “We saw it, put in an offer and closed in less than 30 days.”

He used an interest-only adjustable-rate mortgage to buy the house, which cost about $1 million. He looked at traditional fixed-rate loans as well, but the interest-only loan was half a percentage point lower, with the rate locked in for 10 years.

“I calculated that I was going to save $25,000 on the adjustable-rate mortgage,” he said. The possible increase in interest at the end of 10 years was capped at 5.25 percentage points. “The worst it could be was 8.75 percent, and saving $25,000, I could put that money somewhere else.”

The family’s plan, Mr. John said, is to make principal payments in addition to the interest, with the goal of reducing his mortgage faster than he would with a 30-year fixed-rate loan.

“We don’t like paying interest,” he said. “Our aim is to pay it off in 15 to 20 years.”

In many ways, this is the ideal strategy for someone taking out an interest-only adjustable-rate mortgage. But even a conscientious borrower faces risks with these types of loans, said Susan M. Wachter, professor of real estate and finance at the Wharton School at the University of Pennsylvania.

One is an unexpected downturn in pockets of the housing market. She said this was happening at the high end of the condominium market in New York, where demand for luxury residences is not keeping up with the supply.

“The supply-demand imbalance leads not to small price changes but to large price changes, even if a market as a whole isn’t showing stress,” Dr. Wachter said. “If you do need to sell to move or get a better job, or your own financial circumstances change, having a mortgage that exceeds the value of the home will put you in a spot.”

Article source: https://www.nytimes.com/2018/12/14/your-money/interest-only-mortgages.html?partner=rss&emc=rss