A reader asks the following:

 My wife and I are in the process of looking at mortgages for a house that we
hope to close in the next 6 weeks.  Rates have come down a bit, which we’re
happy about, but we still have 2 questions:1. What do you think of an interest only loan with a slightly lower rate if we
commit(to ourselves)to making payments as if it were fully amortizing?  Is
there any drawback to this strategy aside from the possibility of not being
dilligent about payments?2. Have you heard of having your parents (or another relative/friend) granting
you a mortgage and you paying them instead of the bank?  This seems like a good
idea to me because it keeps the money in the family.  While it may not be the
best financial investment for them in the short-term it seems that they would
be interested because ultimately that money would come back to their kids
anyway.  Thoughts?

I’ll address each point individuallly.

1.  Interest only mortgages in themselves like any other type of mortgage is not problematic.  As with any mortgage, they become problematic when they are used by borrowers to buy more house they can actually afford  or exposes the borrower to more risk than he or she might understand.   From what I can pick up from your letter this is not your case.   I’d say if you can get interest only mortgage with the exact same terms as conventional mortgage, go for it.  Why ever bypass a free option if you have discipline not use it?  Of course that’s the rub (or rather rubs).  Do you have the discipline and all the other terms equal?  I’ll take your word for the former.   The latter however is unlikely to be the case.    I like to think of all mortgages as a variation of 30 year amortized 1 year ARM.     Want the option of amortizing it over 40 years?  You have to pay for it.  Want to lock in rate for 3-Years or a longer long in period such as the full 30 years, you have to pay for it.   Want to only have to pay the interest on the loan?  You have to pay for it.  And how do you pay for it?  Either directly via the rate or by paying points.   So any lender offering an interest only option on loan should have the same  loan without the interest only option at better rate or lower points.  If this is not the case, by all means take the free option.

2.  Yes I have.  And each time I’ve heard of complications.  Some are administrative and financial.  Taking the mortgage deduction will not be an easy matter.    There are a bunch of legal hoops to jump through.  The loan must be securitized by the home.   Remember when you get a mortgage through a traditional lender, the title is strictly speaking in their name.  If you were to borrow from relatives, those same conventions must be followed, and your relatives would then be of course subject to the income taxes associated with the interest they earn.   Financially speaking assuming you do everything on the up and up, it’s not a bad move that may be beneficial to all parties.   However this is more of personal issue rather than a financial one.   It really depends on the type of relationship you have with the potential lender.  Power and control issues could easily arise.