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As a mortgage broker, I disagree with least 50 you can each contribute $5,000 a year.
some of your views on interest-only A Roth doesn’t offer an immediate tax break.
loans in your column last November. That’s because, unlike a 401(k) or 403(b), you don’t
Years ago, there was an expectation of invest what are called pretax dollars—money that
actually paying off your mortgage someday. has yet to be taxed by Uncle Sam. With a Roth, you
Today, most people move more frequently, invest money that has already been taxed.
and the expectation of paying off the mort- What’s so great about a Roth IRA? Once you
gage has diminished. turn 59, you can withdraw money from it without
Stacey Moschetti, via e-mail paying tax. And the Roth IRA rewards you for being
a great investor, while the 401(k) and 403(b) make
THE MORTGAGE LENDING industry created you share your winnings with the IRS.
interest-only loans because it’s the only way for bor- Let’s say you turn $100,000 of contributions
rowers in high-priced regions such as Northern into $1 million within your retirement accounts. In
California to qualify for a mortgage. a Roth IRA you get to keep all of your $900,000 win-Interest-only mortgages are offered to borrowers nings when you withdraw the money. With a 401(k)
on the premise that they will build up enough equity or 403(b) you have to share your winnings, as well
to be able to refinance or sell in a few years—before as your original deposits, with the IRS. That could
their mortgage gets expensive. But there is no guar- possibly take a good 30 percent or more from your
antee that prices will always rise. bottom line.
FINANCIALconnection
Do interest-only loans
mortgage your future?
KIE TH LATHROP
Even if you don’t see the risk in these loans, the
federal regulators sure do. At the end of last year they My wife and I are in our 70s and own our
started to issue notices that could make lenders more home mortgage-free. The property is proba-
hesitant to offer “nontraditional” mortgages—such bly worth $2.5 million. But we are deep in
as interest-only loans and optional adjustable-rate debt. Should we take out a reverse mort-
mortgages—to people with weak credit or finances. gage to pay off our debts?
Regulators worry that some borrowers lured by these James Kamada, Manhattan Beach, CA
mortgages’ initial low payments won’t be able to
handle higher payments later. Lenders would then be THE GOOD NEWS is that you own your home free
at risk for loan defaults. and clear. The bad news is you obviously don’t have
A home is the biggest investment most people the cash to pay your bills. A reverse mortgage can
will ever make, so I don’t believe in taking big risks. make sense, but you will lock in a monthly amount
At this point, with housing primed to slow down a from the lender that won’t ever change and may not
bit, I think it is especially risky to take out an inter- cover the inevitable rising living costs that come
est-only loan that adjusts in a few years. If that is the with aging, when we tend to need more assistance,
only way you can afford a home, I say wait a few as well as the regular impact of inflation.
years until you have the income or down payment I think a smarter move would be to consider
to qualify for a more conventional loan. selling your home and moving into a less expensive
place, or perhaps an assisted-living community,
My employer has a 401(k) and I have maxed which is an increasingly popular option for older
out to their contribution level. My wife is a people who want a combination of freedom and
teacher and contributes regularly to her support when needed.
403(b). Should we put any additional contri- Making your move today means you can cash in
butions into either of these or contribute to on a great tax deal. Assuming you and your wife file
a Roth IRA? a joint tax return, your first $500,000 in profit from
Dave DiNardo, Altamonte Springs, FL the sale will be tax-free, and the remaining profit (the
difference between what you paid for the house—
I LOVE THAT YOU and your wife are investing for including all capital improvements you’ve made over
retirement, but don’t invest a penny more than what the years—and what you sell it for) will be hit with the
is required to get the maximum matching contribu- current long-term capital-gains tax rate of 15 percent.
tion. After you get the maximum contribution, your With your remaining money you have plenty of
focus should be on fully funding a Roth IRA. options. First, get that debt paid off. Then, when it
With a Roth IRA, you can each invest $4,000 comes to your new home, go for something you can
this year if you file a joint tax return with a modified buy outright that still leaves you with some leftover
adjusted gross income (MAGI) below $150,000. cash. That money is to be invested—conserva-
(Single filers are eligible with a MAGI below tively—in high-quality bonds to generate income
$95,000.) By the way, if you both happen to be at that will pay your bills. C
