Wednesday, October 20, 2004

Q: We are a semiretired couple on a fixed income. Would it be advantageous

for us to take out an interest-only loan equal to 75 to 80 percent of our home’s value if our goals are: to make repairs to the house, pay off all our consumer debt, and eventually sell our house

and relocate?

Two more questions: Are there interest-only loans that will allow payments toward principal? Is it beneficial to disclose our eventual relocation plans to the lender?

A: You have asked a lot of questions. Let me try to answer them as best as I can in relation to your situation.



From your e-mail, I understand that you want to make repairs to your home, consolidate consumer debt, and eventually sell your house and relocate.

Taking out an interest-only loan to pay off debt and make house repairs is fine as long as you know the cost. Because interest-only payments do not curtail principal, you can expect a low monthly payment.

Perhaps this is good for you if, being on a fixed income, the payments on your consumer debt are difficult to manage. Indeed, the payments on an interest-only loan will, in most cases, be far lower than the payments required to service consumer loans, such as credit-card balances.

This means you will probably be able to take out enough money to accomplish both goals and still lower your payment.

However, it’s important to look at the big picture before making any decisions.

You indicate that you will be relocating. When?

How much money do you plan on spending on the repairs?

More important, will you earn back the money you spent in the form of a higher sales price?

Here’s what I’m getting at: I don’t know how much equity you have in your house, but you want to be sure that you don’t waste it on repairs or improvements that cannot be recouped when you sell.

Paying off consumer debt with a mortgage loan is usually a good thing because the interest rate — the cost to borrow — is lower.

Pouring borrowed money into your house is another story. Remember that when you eventually sell your house, the only cash you will receive is the difference between the loan balance and the purchase price, less the sales commissions. Make sure you spend your equity wisely.

Your last two questions are easy.

Interest-only loans will allow you to make payments toward principal as long as there is no prepayment penalty. If your relocation is expected within three years, make sure any loan you take out contains no penalty for early payment.

Regarding your last question, I see no reason to tell the lender what your plans are. It’s none of the lender’s business. The only thing the lender cares about is whether you make your mortgage payment on time.

Your situation is too complicated for a mortgage column. A good loan officer will sit down with you, outline your objectives and make recommendations for the best course of action.

Henry Savage is president of PMC Mortgage in Alexandria. Contact him by e-mail (henrysavage@pmcmortgage.com).

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