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My wife and I are selling a home in which we have seen considerable appreciation. We are buying a similarly priced but larger home.

We are considering an "interest only" loan to get a lower monthly payment and keep some of our equity from rolling into the new home. The retained equity would be reinvested into another vehichle (likely the stock market). The difference in the monthly payment would also be invested. (We would finance less than 80%, so no pmi.)

The upside is:

1) any future appreciation in the home that we are buying is financed with less equity and means a greater return per invested dollar

2) the new investment is tax deductible same as if it were rolled into the home the same overall amount is financed. this tax deduction would also remain constant over the years, unlike a typical loan which shrinks as principal shrinks.

3) the investment is more liquid than equity in a home and more in our control

4) risk is spread over different types of investments improving security of investments

5) we are young and the stock market traditionally has a better long-term return than the mortgage rates (let alone a mortgage rate less a tax deduction).

The only reasons that I have heard not to pursue this is:

1) we would never own the home

2) if the real estate market turns down, we could end up owing more than we borrowed.

But as I see it, all investments have risk and a down turn in the re market would mean more money was lost on our investment if we had taken the typical 30 year fixed or ARM and rolled all of our equity. In thirty years, I hope to have much more in my other investments than the price of the home and retain any appreciation. Therefore, I still come out ahead.

But I am cautious (and long winded) by nature. So long story short. What are the other downsides to this type of mortgage? (I was not able to find it in old postings or the Home section of the MF.)
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