For What Types Of Borrowers Are Interest-Only Mortgages Suitable?
Interest-only mortgages are for borrowers who have a valid use for a lower initial required payment, and are prepared to deal with the consequences. • Pay principal when convenient: borrowers with fluctuating incomes may value the flexibility the IO mortgage gives them. When their finances are tight, they can make the IO payment, and when they are flush they can make a substantial payment to principal. • Buy more houses: it is common for families to begin with a “starter house”, then move into a more expensive house as their incomes rise. This process of “trading up” carries high transaction and moving costs. You can avoid these costs by skipping to the second house now. In the short term, this will cause a cash flow strain, but the IO mortgage may make it manageable. • Invest the cash flow: For most homeowners, paying down mortgage debt is the most effective way to build wealth. Nonetheless, some may build wealth more rapidly by investing excess cash flow rather than paying down their
