Interest-Only Loans: Are They All Bad?

Robert J. Bruss, a lawyer and real estate broker, replies to inquiries about housing and mortgages in his syndicated column.

In his most recent Q & A session, he addresses interest-only mortgages — something many of us in Florida know all too well about. Are they all bad? When would they be a good option, if ever? The answer may surprise you. Let’s take a look at what Mr. Bruss has to say about these exotic Florida home loan financing options.

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Q: I have around $300,000 equity in my home. My current mortgage balance is only about $34,000. Although I am retired and in good health, I am “only” 64, so a reverse mortgage won’t give me much because I am too young. I have a decent retirement income, but not enough to afford to go with my friends on cruises and afford other frivolous expenses.

The banker at my community bank, where my late husband did business for many years, suggests I get a 30-year fixed-rate mortgage with “interest only” payments for the first 10 years. There is no negative amortization, which you often warn about. He says I can easily afford the monthly payments, even after they “adjust” in 10 years to pay off the loan in 20 more years. My children advise against it. Your opinion, please!

A: Go for it! Enjoy your home equity. It is possible that your children realize you will be spending what will be their inheritance so they want to discourage you from fully enjoying your retirement while you are still in good health. There is nothing necessarily bad with interest-only mortgages that don’t have negative amortization.

Basically, from how you’ve described it, the Florida mortgage option you have in front of you sounds ideal as long as you can afford the monthly payments on your retirement income, both now and in 10 years when the monthly payment adjusts.

The type of mortgage that gets homeowners in financial trouble is the so-called “option ARM” where the monthly payments are so low they don’t even pay the interest. When that happens, the lender adds the unpaid interest to the Florida mortgage loan balance, resulting in negative amortization where the borrower owes more than the original balance.