Have you been thinking about buying a home lately? If you are, you may have heard that interest only mortgage loans may be a good option. However, you may be wondering what an interest only mortgage loan is. The name implies that you would only pay the interest of the loan.This is correct. Instead paying the payment and having part of it go to principal and interest, your payment only goes towards the interest. However this does not last for the entire time of the loan.
As the mortgage is being set up, the interest only payments are set up for a certain number of years. Once those years are up, the borrower will trade in his interest only mortgage loan towards a more traditional loan where he will begin making payments on the principal balance.
Interest only mortgage loans are usually set up with interest payments being made for the first ten years of the loan and then the loan will be changed. Many people are interested in the interest only mortgage loans because the borrower is allowed to make a smaller payment for the first ten years. Since there will be no payments toward the principal, the payment is lower than a conventional loan that has been financed.
If you buy the home to live in and can forecast that your income will increase, you may be able to qualify for the interest only mortgage loan because the lower payment will reduce your income to debt ratio. Interest only mortgage loans allow an investor to keep more cash flow that may allow them to make improvements on the home so that they can sell or it can just keep more of your money in your pocket if you plan on selling the home quickly.
There are some disadvantages to interest only mortgage loans. The biggest disadvantage is that it is risky for the borrower. When using traditional financing, a buyer begins to build equity almost from the start of the loan. On the other hand, with interest only mortgage loans you will not be building any equity. Equity results from paying the principal down, and since that does not happen with this type of loan, you will not build equity.
What is wrong with not building equity? When the interest only years end, you may risk not being able to afford the higher payments. The payments that you will have to make will be higher than a traditional type of a loan. That is why it is especially important to forecast whether your income will increase.
If it does not, your payments may be too much to afford. Also you may not be able to sell your house because that timing will not allow for a buyers market. Then you will not be able to get a home equity loan because a refinanced loan is given as a result of equity in the home and since interest only mortgage loans do not allow you to build equity, you will not be able to attain refinancing.