If you are considering using an interest only mortgage to finance your home, there are several things you need to know before applying for this loan. Interest only mortgages can be an excellent solution to a short-term financial need; however, if these loans are used incorrectly there is a significant amount of risk that could cost your home and your financial well-being.
Interest Only Basics
Interest only mortgages are simply a mortgage loan where the payments are only the amount of interest due that month. There is no principal included in your monthly payment amount; the result is a much lower monthly payment. These loans are not interest only forever; the principal balance will come due at a time specified in your loan contract. Interest only mortgages provide a period of time where the borrower can make lower payments. After this period is over the borrower will need to refinance or begin paying a higher amount that includes loan principal. This period of time usually lasts for five years.
Interest only mortgages are intended as short term method of financing your home. This is ideal for the real estate investor or homeowner that requires a low monthly payment for a period of time. These mortgages are often abused by homeowners that use them to purchase more home than they would qualify for with traditional mortgage financing. The danger in purchasing more home than you can afford with an interest only mortgage is that you may not qualify for refinancing later down the road when the loan principal is due. If you cannot make your payments you will lose your home.
The advantage of an interest only mortgage is the lower repayment amount. Because the monthly payment is only interest and none of the loan principal, you can save yourself a lot of money each month; your payment amount could be as much as $200 less each month. The other problem is that if you keep an interest only mortgage for a long period of time you can seriously overpay for your home.
Interest only mortgages are an excellent short-term financial tool; however, they need to be used responsibly. If you are a homeowner that moves from one property to the next frequently, interest only mortgages could save you money. To learn more about your mortgage financing options and how to avoid making common mistakes, register for our free mortgage guidebook: “Mortgage Loans – What You Need to Know.”