Thanks for your comment, and I’m glad that you enjoy the blog!

I’m very cynical about borrowing. I admit that my knee-jerk reaction to many of the loan options available seems to be a jaded one, in that I assume that the lenders are trying to shoe-horn everyone with a pulse into the mold of a good credit risk. A few years ago many people who can qualify for a loan now would have been shown the door.

Unless the Federal Reserve can magically soften the landing from this credit bubble (doubtful), banks are going to get taken to the cleaners when these adjustable rates ratchet up, the marginal borrowers default, and they get left holding the bag. Then, they finally might toughen up their lending standards, and IO loans will be rare again. Which is as it should be — people should be made to pay back what they borrow!

So yes, IO HELOCs can get you out of a bind. But the reality is that the lenders will be more than happy if you have one and just pay the interest. The “flexibility” of these loans is quite profitable for them, and further if the IO HELOC is adjustable rate, they’ll never have to worry about a negative spread. They wouldn’t offer the loans if it weren’t a fantastic deal for them.

I think that there are much sounder ways to protect yourself against hard times. Like saving!

Thanks again for your comment.

…

The flexibility argument made in the Kiplinger article is a sound one IMHO. In the event of job loss or other financial emergency, the ability to fall back to a smaller, interest-only payment can be huge. A similar tactic would be to take a 30-year mortgage, but pay it down according to a 15-year amortization schedule.

Of course if you don’t have financial discipline (and many don’t), fixed-rate, fixed-payment is probably best. Keep in mind that closing costs for a fixed rate home equity will generally be higher than for a HELOC.

Other flexibility features inherent in a HELOC include the ability to easily switch into and, when necessary, out of 0% credit card balance transfers. This type of move takes great care, but it can save a lot of money.

Not suugesting HELOCs (or any variable rate debt) is for everyone, but neither is a fixed rate loan always the best option.

Nice blog BTW.

Sarah, I agree. If the only kind of loan that someone can qualify for is interest-only, that’s a red flag. It indicates that they’re borrowing too much for what they can comfortably afford. Or, if they can afford a fixed-rate loan, they’re doing no better than renting by taking an IO loan.

Negative amortizations are dangerous. They are reasonably safe for the lender in a hot real estate market, but not if it’s cooling off. They’re disastrous for the borrowers because they owe more with each payment.

I actually saw a loan promoted recently that was worse; it allows negative-ammortization because you can opt out of payments if you can’t make them. Yiy!

btw, I linked to this post as one of my posts of the day..

keep up the great job!