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Beware Interest Only Mortgage Loans

Americans are using interest only mortgage loans more frequently to purchase homes they cannot afford with traditional mortgages. These loans are popular with real estate investors but are being increasingly used by families to lower their monthly payments and stretch their home purchasing budgets.

Homeowners that use these kinds of mortgages make interest only payments and do not pay the principal balance on the mortgage at the beginning of the loan. This introductory period can last from three to five years and typically comes with a lower interest rate. This introductory period can significantly lower monthly mortgage payments at the beginning of the mortgage loan.

At the end of this period your payments will increase dramatically. This happens because the mortgage principal payments are now due in addition to the interest. When this happens your mortgage will be amortized for the remaining term of the mortgage. This term could be as low as 25 years depending on the length of the introductory period, instead of 30 years. The interest rate is also recalculated using current rates which will raise your payments even more.

These mortgages can be useful tools for homeowners that stay on top of their finances; however, the average homeowner should not utilize an interest only mortgage as it is extremely easy to get into trouble. Mortgage brokers may push these loans on homeowners that are unfamiliar with the risks; this is often a recipe for disaster.

Many homeowners don’t understand how these interest only mortgages work and how fast their payments can rise after the introductory period finishes. These loans often come with heavy prepayment penalties that can cost thousands of dollars to get out of the mortgage. The increasing popularity of these loans has caused the government to issue warnings regarding the risks of interest only mortgage loans.

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