Interest Only Home Loans

Mortgages traditionally were very standard. They all had terms of thirty years and interest and principal were paid down in an amortization. Then, recently came interest only home loans. This allows payment of only the interest accruing on your mortgage while not paying down the principal balance at all.

Typically, your payment was the same over a 30 year period. With an interest only mortgage the payment is initially lower. Then, later into the loan it increases once principal needs to be serviced. This can result in the payment amount going higher than what you can afford. This scenario never ends well.

Some mortgages come with what are called very low "teaser rates". This initial interest rate can be as low as 1%. It makes the original payment amount very low. Borrowers get tricked into thinking that will be their payment forever. However, this isn't the case. Once the "teaser" period ends the rate goes up dramatically.

Once this happens the usual end result is a foreclosure. Whenever you seek a mortgage you must read the fine print. Ensure you understand exactly what your payment will be at all points during the loan. This is an easy exercise with a fixed rate mortgage. They payment will always be the same unless you choose to refinance into a lower rate.

Another problem with interest only mortgages is that without paying down principal you are not building equity. Interest rates can become more attractive into the distant future. If you haven't paid down principal, then you very well may not have sufficient equity to take advantage of lower rates. Your loan to value ratio will be insufficient.

There are instances where an adjustable rate could be beneficial. If you are planning on only owning the home for a short period it could save you versus getting a fixed rate. Be sure of your exit though. If you end up staying longer than expected those savings could quickly evaporate. Make sure to evaluate all different ARM options. They reset after varying periods.

Another group which benefits from adjustable rate mortgages are those seeking to flip houses. With very short duration ownership an interest only loan keeps down cash out of pocket during the first few months thus increasing return on investment for a flipper. However, as you have probably seen on television, flipping is not as easy as it seems.

Interest only home loans do have their place. However, there are many borrowers who secure them who really are better off with a fixed rate loan. Make sure you fully understand all the fine print. Know exactly what your payments may be into the future. A little research goes a long way when looking at mortgages.