Interest loan mortgage only payment

Question: I have been approached about refinancing my condominium with an interest-only mortgage loan.

Other than lowering my monthly payment, what are the advantages and disadvantages for a 67-year-old single individual to participate in this type of financing?

I owe $101,000 on my place, and it's worth more than $200,000. My mortgage interest rate is 6 percent.

-- W.C.

Answer: The LIBOR (London Interbank Offered Rate) mortgage loans are very flexible, allowing a variety of options in monthly payments.

The problem we face in housing is a potential double whammy.

First, with the trailing rate of inflation at 3.1 percent and rising while the one-year LIBOR rate is only 2.4 percent, borrowing is simply too cheap.

Rates are likely to rise to some premium over inflation.

These artificially low rates, however, are setting the stage for future damage.

How?

By encouraging people to buy more house than they can afford and creating a pool of future anxious sellers when higher interest rates rise and increase monthly payments.

Ironically, this probably will work to create a future overhang of unsold houses.

That, in turn, will work to suppress -- flatten -- future home prices in many areas.

Basically, today's low-rate mortgages have borrowed against future appreciation.

Bottom line: At 67, your best move would be to pay off the mortgage -- if you have the ready cash.

Personal finance questions may be sent to Scott Burns, The Dallas Morning News, P.O. Box 655237, Dallas, TX 75265; fax: 214-977-8776; e- mail: scott@scottburns.com.

Copyright Copley Press Inc. 2004
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