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Interest-only mortgages don't deserve your interest

Can you explain interest-only mortgages? Are they a good idea?

Dear Dave,

Can you explain interest-only mortgages? Are they a good idea?

Dale

Dear Dale,

An interest-only mortgage is just what it sounds like. You're paying only the interest on the loan, and none of what you actually owe. It's a good way to stay in debt for the rest of your life, so they're not a good idea.

Lots of people look at this product and say, "Wow, I'll get a lower monthly payment, and then I can throw tons of cash at the principal." Guess what, in most cases it doesn't work out that way. Why not take out a good 15-year fixed rate mortgage and put a bunch of money toward the principal? Everyone thinks they have a great idea for tricking the system. But the only system that really works is to pay off debt as quickly as you can.

Interest-only mortgages are like adjustable rate mortgages and high fixed rate mortgages — they're good things to stay away from completely!

-Dave

Dave Ramsey is America's trusted voice on money and business. He has authored five New York Times best-selling books: Financial Peace, More Than Enough, The Total Money Makeover,EntreLeadership and Smart Money Smart Kids. The Dave Ramsey Show is heard by more than 6 million listeners each week on more than 500 radio stations. Follow Dave on Twitter at @DaveRamsey and on the web at daveramsey.com.

I’m debt-free except for my home, and I’ll have that paid off in about 12 months. I currently make $60,000 a year and live in an area of Florida that is designated a flood plain,

because a river that empties into Tampa Bay runs behind my home. Currently, I’m paying $1,070 a month for flood insurance. My house is worth $325,000, and water has only come up into

the yard twice in over 20 years. Since I’m doing pretty well financially, do you think I need to keep my flood insurance policy?

Trudy

Dear Trudy,

From what you’ve told me about the history of your property, it sounds like your biggest concern might be if a hurricane caused a backwash in your area. Insurance is already pretty

tough in Florida when it comes to those kinds of things, but you don’t want to run the risk of your house getting mowed down and losing everything.

If I were in your shoes, I think I’d like the protection of flood insurance. What you’re paying for the policy is such a small percentage of your world, compared to the value of your

home and your income. Keep the coverage, Trudy!