A second mortgage loan with interest only payments is a loan that does not have fully amortized payments for the entire duration of the loan. This means for the interest only period specified in your loan contract your monthly payment will be significantly lower and based solely on the interest due that month. The interest only period of this type of loan varies between one and five years depending on the lender.
The main advantage of this type of home equity loan is that you can get your hands on the cash you need with very low payments for a period of time. The disadvantage of this type of mortgage is that when the interest only period ends, the payments will be fully amortized based on the time left on the mortgages term. This means that if you took out a fifteen year interest only second mortgage with a five year interest only period, after the first five years are up your payment will be based on a ten year repayment schedule. What this means for you is a higher monthly payment amount at the end of the interest only period.
Interest only loans make good financial sense if you know you will be selling or refinancing before the end of the interest only period. This allows you the benefit of low payments without the risks associated with adjustable interest rate loans. If you plan on keeping the loan it is important to realize that your payments will be much higher at the end of the interest only period and to budget accordingly. A second mortgage loan is secured by your property just like your primary mortgage; if you fall behind on the payments your lenders could foreclose and take your home. You can learn more about your mortgage and home equity options by registering for our free mortgage guidebook: “Mortgage Refinancing: What You Need to Know.”