Q: I am 67 years old and I live on a fixed, limited income. I intend to buy a house and am wondering how to finance it.
Would an interest only-loan be suitable for me because it would have a lower monthly payment? I would rely on home value appreciation alone to build up the equity.
A: The best loan for you is the one that allows you to buy what you want but doesn’t sink you into a hole from which you can’t get out.
I assume that because you’re on a fixed-income at 67 years of age, your income isn’t going to go up any time soon. And that could cause a problem down the line with an interest-only loan.
Interest-only loans allow you to pay only the interest payment for the first 2, 5 or 10 years of the loan. At the end of that time period, the loan adjusts into a conventional interest-and-principal loan except that you’re paying off the principal on a faster amortization schedule.
For example, if your loan has an interest-only period for the first 10 years, you’ll then have to pay off the principal over the next 20 years, rather than over 30 years with a conventional mortgage. So your payment could jump by $1,000 or more, which might be tough to handle financially if your income remains fixed.
In addition, some interest-only loans carry a variable interest rate, which will rise and fall depending on what happens in the bond market. If interest rates rise significantly, you could wind up being hit with a much higher payment than you’re expecting.
Of course, you may be able to refinance later with another interest-only loan, and then another after that, and avoid repaying the loan principal entirely. But you’ll need to make sure your credit stays clean, otherwise you may not be able to refinance your loan when the time comes.
At your age, you’re going to want to know how much you’ll spend each month on your mortgage, real estate taxes, insurance and home maintenance. Instead of spending every last cent on an interest-only mortgage, consider buying a less expensive property with a conventional (interest and principal) loan.
Or, if you’re a handy kind of person, consider buying a multi-family building, where you can rent out one, two or three units and use the income to help pay your mortgage.
Be sure to read the fine print so you understand the loan terms before you sign on the dotted line. If you have questions, a real estate attorney ought to be able to point you in the right direction.