INTEREST-ONLY LOANS ARE NOT FOR EVERYONE.

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Author: Stay, Julie

WE ARE PLANNING TO BUY A HOME SOON AND HAVE BEEN RESEARCHING THE DIFFERENT KINDS OF MORTGAGES AVAILABLE NOW. OUR BROKER IS PUSHING FOR US TO GET ONE OF THOSE "INTEREST-ONLY" MORTGAGES, BUT MY HUSBAND IS NOT QUITE CONVINCED THAT IT WOULD BE THE MOST CONVENIENT FOR US. HOW DO THEY REALLY WORK? DO YOU RECOMMEND THEM?

That depends on your individual financial circumstances and long-term goals. Interest-only mortgages--aggressively pushed today by lenders and brokers--could be wonderful for some people, but they're not for everyone. Unlike a conventional fixed-rate mortgage (in which the monthly payment contains both the monthly interest and a contribution to the principal that allows the mortgage to be paid off over the life of the loan), an interest-only mortgage is not self-amortizing. That means that you will never pay off your debt through your monthly payments. At a certain point you must contribute more (much more) to pay the principal.

Who might benefit from this kind of arrangement? In the first place, people who receive income mostly in the form of infrequent or far apart commissions or earnings. For instance, with an interest-only mortgage, a person whose moderate salary is balanced by bonuses twice a year has the option to pay the lowest possible amount during those long low-income months. By the same token, that mortgage would allow him/her to pay big parts of the principal when the commissions arrive. Someone who is determined to invest his/her savings on the difference between an interest-only mortgage and an amortizing mortgage could find an enormous advantage with that kind of mortgage; sure enough, if those investments are not profitable in the long run, his/her selection of a interest-only mortgage might prove unwise.

Individuals who expect to earn a lot more money in a few years might also profit from an interest-only home loan. Many times, younger borrowers who have a future of increased earnings and really want to maximize their buying power now are ideal interest-only candidates.

Who should avoid interest-only mortgages? Mainly regular wage earners who take out moderate-size home loans and don't have a strategy for investing the savings. The main attraction of an interest-only mortgage loan is that, for a fixed period of time--usually five to seven years--you pay only the interest on the mortgage in monthly payments. When that time is over, the mortgagor (the borrower) is faced with three options: refinance, pay the remaining balance in a lump sum, or start paying off the principal. Those choosing the latter will experience a formidable increase in their payments.

Take a look at some of the most attractive characteristics of an interest-only mortgage and see if they work for you:

• It doesn't charge you for the principal, at least not in the initial years of the loan.

• It reduces your monthly mortgage payments to a very low amount.

• It can help a homeowner qualify for a bigger house.

• It can free up funds for other purposes.

• It usually has adjustable rates (considered an ARM, or Adjustable-Rate Mortgage) but can also have a fixed initial term.

• It gives you the option of paying down principal whenever you want.

It's obvious that restructuring your principal-and-interest loan to an interest-only debt may provide some financial slack in your monthly spending plan, but consider the hazard it involves.

• Mainly, the risk of an adjustable-rate loan that could increase your payments at any time.

• The closing costs associated with a new mortgage.

• The great disadvantage of not paying down your remaining, loan balance.

• And the probable impact that lowering your interest payments might have on your income-tax deductions.

The interest-only period of your mortgage may feel like a blissful honeymoon, but keep in mind that after every honeymoon there's a marriage to deal with, and that's when you really get to prove your mettle.

For more information visit www.JulieStav.com Listen to Julie Stav's radio program Monday-Friday on your local Univision radio station.

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By Julie Stay