From: BreadWithSpam@fractious.net
Newsgroups: misc.invest.financial-plan
Subject: Re: ARM 3 year vs 30 year
Date: Fri, 28 Jul 2006 12:11:44 -0500
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	CVqBI0tq24Fp54VOY7mXjOdkEnB+SGXqcesJi82+WZ+x2fCo5w3Mmg==
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darkness39@yahoo.com writes:

> If you think housing prices are going to continue going up, it is not
> irrational to borrow on an interest only basis.  This is effectively
> what something like 1/3rd of UK housebuyers do.
> 
> Your equity will keep rising-- you have borrowed to purchase an
> appreciating asset (and one which is highly tax favourable, at least in

Assuming you can comfortably make those payments, there is still
one potential major danger - after the term of that IO mortgage
is up, you need to either get a new mortgage (at whatever the
prevailing rate is, and with whatever income you may have at
that time) - or have enough cash to pay off the house - or sell
the house and move.

Admittedly, that might be 30 years in the future.

But if one gets an IO mortgage and does *not* start saving
(and investing) the money which would otherwise have been
paying down principal over that time, one could get into
trouble.

I'm in no rush to pay off my house.  I got a 30 yr fixed
and have no interest in prepaying any of it - the house
is appreciating nicely, as have been the the investments
I've made with money that could otherwise have been used
to pay the house off.

But not everyone manages to actually make that savings.

If one gets an IO mortgage because it's the _only_ way he
or she can "afford" the house, I'd say that he probably
can't really afford it and ought to be considering a
bit less house.

> If you hold on *long* enough, the bet is not a bad one.  My own view is
> property prices will fall by 30%-- but I am quite a stale bear on this
> ;-).

I wouldn't necessarily bet on that.  But I would want to be
certain that if that were to happen, it wouldn't wipe me out.

> > , insurance, etc.  And then, children need braces, cars
> > need replacing, etc.  So they start building equity line and credit
> > card balances.  I can't recall an interest-only user who did not also
> > have other consumer debt.  And as for a decent emergency fund, next
> > car purchase fund, vacation fund, etc.... forget it.

In theory, there's nothing wrong with an IO.  In practice,
they seem often to be used by folks who probably ought not
be using them.



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