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Author: Patzer Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 308683  
Subject: Re: Interest Only Mortgage Date: 9/22/2005 1:40 PM
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How about this scenerio:

- Own a home in an *hot* area that has been appreciating at a rate of 8%/year for the past 6 years.

- Will still have 30-40K equity in the home after the refinance.

- Have significant CC debt that you are trying to clear (unusual debt, due to job loss, not an ongoing problem with spending)

- Are planning to definitely move within the next 5 years.

Would it make sense then to take the interest only and use the extra $$ to pay off the CC debt?


There are two thoughts here:

1) Cash-out refi of the mortgage, using proceeds to retire CC debt, and
2) Interest-only mortgage, planning to sell the house later at a profit.

Under the stated assumption that there is no ongoing problem with spending, point 1 could be considered. Whether it makes sense depends on the total financial picture, including risk of further unusual debt and stability of income stream. On this board, we don't like the assumption that there is no ongoing problem with spending. There are too many cases of that assumption being made, and reality failing to conform to the assumption.

Point 2 is a straight speculation in the housing market. It's a bet that the housing market will only go up, not down or even sideways. I don't like this bet. I tend to think that when people need interest-only mortgages to buy a house, housing prices shouldn't be rising a whole lot more or there will be no buyers who can afford the financing.

If there's enough cash flow to have a traditional mortgage, I don't like failing to pay any principal. If there is so little cash flow (even after retiring the CC debt) that an interest-only mortgage is all that can be handled, this is an incredibly high-risk bet on real estate prices.

I don't like this plan at all.

Patzer
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