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When does it make sense to get an interest-only loan when purchasing a home? Is this financially irresponsible?


The short answer to your first question is “certainly not now and maybe not ever.” Interest-only mortgages don’t stay that way forever. After several years they are converted to conventional repayment mortgages at whatever interest rate prevails at the time. With rates close to all-time lows – the authoritative website recently showed an average rate of 3.43 percent on 30-year, fixed-rate mortgages – how much of a better deal are you likely to get in five or 10 years when your mortgage is converted?
True, an interest-only loan will have lower monthly payments, but that’s because you’re not paying down the principal. That could leave you exposed if the housing market makes another move lower, and because an interest-only loan allows you to buy more home than you can afford, it could heighten your vulnerability to adverse developments in the market, the economy or in your own personal financial life. That, to answer your second question, is certainly not financially responsible. So why risk it? Buy a home with a 30-year repayment mortgage for which you can easily afford the payments, then relax in the knowledge that you’re helping to insulate yourself from whatever turbulence may come along down the road.
-Conrad de Aenlle