Flagpole wrote:
webby,
Simplistic doesn't necessarily mean not well thought out.
I think you are thinking of the word, "simple," as opposed to simplistic.
I do agree that simple is how most people need to keep it. But it's simplistic to say things like, "No on should ever take anything but a fixed-rate loan that's not interest-only."
For someone who is good with numbers, what's important is not whether a loan is fixed or adjustable, interest-only or fixed (or negative amortization, for that matter) -- but which combination of time, rate, and rate-of-payoff works best for his/her own circumstances. Equity in a home is not intrinsically better or more important than equity in any other asset.
If you could get a 30-year-fixed-interest-only loan at 5.5% when a standard 30-year-fixed is going for virtually the same rate -- as it was at times recently -- the only reason not to do it is if you don't trust yourself to make better than that 5.5% return on all of the money you are saving each month. Many of us, furthermore, pay a real interest rate under 4% after deductions. Meanwhile, the interest-only borrower of $400K may have an additional $500/month going into equities, which, though doing poorly of late, are likely to give robust returns over the next 25 years -- more than enough to pay off the mortgage of the house in cash in less than 30 years -- were it wise to do so.
Furthermore, if you have an IO loan, you can pay as much extra as you like whenever you choose. There's no rule against paying down your mortgage as much or more than a you do with a traditional mortgage -- when it makes sense for you to do it. So for anyone who understands the above issues, the *only* reason not to take an equivalent IO is if you are too irresponsible to be trusted with financial flexibility.
As for adjustable-rate mortgages, the fact is that most people move in 7 years or less. So it may be a gamble, but it's a reasonable one. A guy with a $400K 5-year-ARM for the past five years at 4.5% v. a fixed 6% saved something like $62,000. (That's about $28,000 in lower payments and $34,000 in additional equity with the lower interest rate.)
That same person can keep all of the extra cash and take out a fixed rate mortgage at today's substantially *lower* fixed rates (zero points, 5%), which will save him another $500/month for the next 25 years, plus interest.
Hard to call that guy stupid for going with the ARM.