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Interest-Only Mortgage Loans: The Ins & Outs

If you are one of the many who are searching for a lower monthly payment with you new home purchase, then an interest only mortgage loan could be the answer that you are looking for. The idea behind these mortgages is that the borrower will only be required to repay the interest portion of the loan during the first few years of the loan which is perfect for those who may be struggling financially now but who are expecting things to turn around later.

Typically, depending on your particular loan terms, the interest only period (the time in which you will only be paying on the interest) usually lasts between 5 and 10 years. Borrowers need to be aware of the fact that their payments will dramatically increase after that time period is up and they should plan accordingly. Usually, you will have between 20 and 25 years to repay the principal of the loan after the interest has been paid.

Another drawback to the interest only loan is that in the event that the housing market drops in your area and you need to sell the property, you may owe more than the home is currently worth. This is because with a traditional loan, you are paying at least some part of the payment on the principal of the loan, while with an interest only loan, all of the money is being paid toward the interest. Therefore you accumulate no equity in the home. This is more likely to happen to California mortgages, Florida mortgage loans, Nevada home mortgages, and Arizona home loans where housing prices have very large swings and increase or decrease very dramatically.

Many lenders will tell you that as soon as you can possibly begin to make larger payments, you should do so by refinancing your loan with a traditional fixed rate loan. By doing this, you will begin to pay down some of the principal and therefore make your payments lower than they would be if you had waited until the interest only period expired.

The implications of misunderstanding the terms of an interest only loan can be devastating since if you can not make these higher payments after the interest only time period has expired, you will likely lose your home. Refinancing is an option, however you will want to have a plan to do so, rather than having it be your only option.

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