When does it make sense to not pay your mortgage?

I have interesting thought problem for /r/financialplanning. A friend bought a house near the bottom of the market in 2011. The house is now valued at around $1.3M, but my friend only has a remaining mortgage balance of around $400k.

He needs to refinance and given his LTV ratio and the fact that he plans to sell in 5 years (as his family will have outgrown the home), would it make sense to look at an interest-only loan? For a slightly larger APR, he can get a 10/1 interest-only loan. With an interest-only loan he can choose to only pay interest on his principal, or he can also make interest+principal payments without penalties (as if he had a normal 30year mortgage).

I argue that an interest-only loan is a good option because if he plans to sell in 5 years, the amount of principal he would have paid down would essentially be meaningless in comparison to the equity he already has. Additionally, I argue, it would be better to take what would have been principal payments and diversify his investments.

[finally, i admit the title is a little click-baity, he’s not really going to not pay his mortgage haha]

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