Who should get an interest-only mortgage?
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J. David Lewis, a certified financial planner with Resource Advisory Services in Knoxville, Tenn., generally frowns upon interest-only mortgages. He says they might be legitimate for fast-trackers who need to present an upscale image for career success.

"I can see, having dealt with a few executives, that it's important sometimes to have a home that you can do entertainment in," Lewis says. "I can't see the average guy doing an interest-only mortgage because I can see him digging himself into a big trap."

Among the traps are the risks that the house will lose value and that the borrower will lose a job.

Mortgage bankers McFadden and Larsen say interest-only mortgages benefit borrowers who invest the money they would have paid as equity. They come out ahead if their investment returns exceed the rate of home appreciation.

"For someone who says, 'It would be better to put my assets into a stock portfolio or college education for my kids,' the interest-only gives you that flexibility," Larsen says. This idea fits in with Larsen's philosophy that middle-class people should have the tools to manage their debts as carefully as they manage their assets.

Tom Muldowney, a certified financial planner with Savant Capital Management in Rockford, Ill., says he has a 75-year-old client with a $45,000 mortgage. She could pay it off with a check if she wanted to. But she has a 4.75 percent interest-only loan, and the interest is tax-deductible -- and she's in the 38.6 percent bracket. With the tax deductibility, she's borrowing at an effective rate of less than 3 percent. It's a slam dunk to earn more than that with a well-diversified investment portfolio, so, McFadden asks, why pay off the loan?

The conservative Lewis agrees that such reasoning is impeccable. "The math always works out," he says. But, he adds, decisions about investing and spending are guided not only by math, but by psychology.

Lots of people tell themselves that they'll invest the difference between interest-only and amortizing mortgages, Lewis says, but not all of them follow through. The money is there, tempting them to spend it on boats, vacations, pampered lifestyles.

"The people who are frugal about going into debt, or don't use much debt, are generally the ones with higher net worth," he says. "It's just that somehow in their life, they accumulate more wealth."