Is An Interest-Only Mortgage Right For You?

Posted by allanmadams on February 17th, 2011 at 04:23pm

An impeccable credit history is no longer necessary for the home of your dreams.  A damaged credit history once ruined all hope of owning one’s own home, but the recent home loan programs have enabled individuals from varied backgrounds to overcome obstacles of low income, poor or limited credit history, and small or even no down payment.  Of these loan programs, an interest-only mortgage may be the right choice.

Interest-Only Mortgage Loans:

In the last decade, interest-only mortgages have seen a rise in their popularity, especially in rapidly growing real estate markets.  While a traditional mortgage is amortized, principal and interest allocated in each monthly payment, an interest-only mortgage requires only the interest to be paid monthly for the first several years. 

But in an interest-only mortgage loan, the interest for the first few years is alone paid. This Interest-only period can vary too. It I left to the choice of the homeowners. The Homeowners may opt for a three, five, seven, or ten year interest-only loan program. When the interest-only period ends, the homeowner can begin making payments toward the principal and interest.

How advantageous is Interest-Only Loan?

A major attraction is the low mortgage payments you have to make in the first few years.  Your monthoy mortgage in interest-only loan option shall be around $800   compared to the traditional (principal+interest) loan where it is anywehter around $1200 per month.  Interest-only loans are the only means to buying homes in a housing boom when you can still afford it even at soaring prices.

The grey area of Interest-Only loan:

When the interest-only period ends, the original loan amount is still owed by the homeowner. When the homeowners begin to make the payments towards the interest and principal balance, the mortgage payments may increase by around 40%. 

Pitfalls of an Interest-Only Loan

This mortgage increase is not affordable by many. It is not a good idea to go in for an interest-only loan if you are planning to live in your home for several years. And if you earn a good income and you are able to afford a higher mortgage, an interest-only loan can be a good choice as it has more benefits.

If an owner is unable to accommodate the amortized payment, selling the home may be the best avenue.  In a growing real estate market, a home may sell in the future for more than its purchase price today.  If this is the case for a home purchase with an interest-only mortgage, the home may be sold prior to the expiration of the interest-only term realizing any gains in equity.  This idea is not without risk.  In a declining market, an unfortunate homeowner may find himself “underwater,” owing more on the home than it is worth and unable to sell the home.

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Under mortgage refinancing Tags: bonds, First Few Years, Grey Area, Home Loan Programs, Homeloans, Interest Loan, Interest Only Loan, Interest Only Loans, Interest Only Mortgage Loan, Interest Only Mortgage Loans, Interest Only Mortgages, Last Decade, Loan Option, Loan Program, loans, Low Mortgage, Mortgage Payments, Mortgage Right, mortgages, Original Loan Amount, Principal And Interest, Principal Balance, Principal Interest, Traditional Mortgage