Interest Only Mortgage - Opinions?

[pearlieq]

Has anyone ever held an interest-only mortgage? What were your thoughts about it? What warnings do you have?

Here's the situation: My mother is 59 and is in very ill health. She has stage 4 breast cancer, which carries a 5 year survival rate of around 20%. Even if she happens to beat the odds, it's quite likely that her health may not allow her to live independently for more than a few more years.

She owns a modest home and has about 10% equity. She is not depending on the home as an asset. Her retirement will be funded by her pension.

She is thinking of refinancing into an interest-only mortgage to help lower her living expenses. I think it might be a good idea if she can find a rate that would make it cost-effective for her to do so after figuring in the costs of refinancing.

Does anyone think this might not be a good idea? Or have ideas and considerations we should keep in mind if she were to go forward with this plan?

[boefixepa]

There are situation when an interest only mortgage is not the end of the world. One thing it is NOT is a long term loan. If you are fairly certain you will not stay in the home long term, and have enough equity to cover a slump in the market where you would have to sell for less then you would like. THEN I would say go for it.

In your mother's case, with the facts given here, I'd say it is a great option, for the following reasons.

1. Quality of life - She knows chances are she is looking at only a few good functioning years left, the less stress over money the better.

2. Life of the loan - She's not looking for a long term loan, so a fixed loan vs. an interest only over the short term are going to be pretty close to the same thing anyway.

3. Equity - Here's the only potential problem I see and I will say given the situation it's not that big of a deal anyway. 10% is not that much and a bad slump could make her owe more than the current worth, but at this stage in her life...aka nuring home or death (I really hope she makes it), it really isn't going to matter.

Given these reason I would say, for her, that it would be a doable option.

[disneysteve]

bofixepa makes some good points. I'd want to know the term of the interest-only period and what happens after that. You mention that she'd like to decrease living expenses. Is that a distinct need for her at this point or is she just looking to build a little cushion into the budget? Has she explored any other options for reducing her expenses?

If she really needs to come up with extra money every month, it might not be a bad way to go. Just keep in mind the consequences if things work out for the best and she is able to stay in the house longer than expected. You dont want her to get hammered with much higher payments 5 years from now.

[pearlieq]

It is definitley a gamble. We'll need to research the various loan tems--I think the goal would be to find the longest possible term. My worries are similar to yours, disneysteve, in that she may actually make it to the end of the interest-only period and then have to figure out what to do from there.

We're trying to strike a balance between being realistic about her situation and prognosis and the idea that we have no idea what might actually happen. This could be her only recurrance and she might have 20 more good years.

I think her overall goal is to reduce expenses as much as possible to build cushion into her budget. She's not at a crisis point where she can't cover the bills, but the costs associated with modifying her house, getting mobility aids, and buying a wheelchair van are very high. Plus I think she's looking ahead to her retirement where she will have a good pension, but less than she brings in now.

I also share the concerns that boefixepa about her equity level. We live in the West suburbs of Chicago and so far the real estate market here has been growing steadily but not to the point of being overly inflated. Her house is serviceable but modest, so she's not exposed to some of the risks that those with larger, more expensive houses have. Still, if the market were to slow or slump when she needed to sell the house there would be problems there too.

Lots to think about...

[Raisecapital01]

I agree with everyone above. I would only do an interest only loan if I was going to stay in the home for a couple of years. Is this home new or old?