Interest Only Mortgages.
Advantages & Disadvantages.

What is An Interest Only Mortgage?

Simply put, an interest only mortgage is one in which the borrower only pays the interest for an initial predetermined period. Then once that term is reached, the principle is added to the interest payment for the balance of the amortization period.

Advantages of Interest Only Loans.

Interest only mortgages are often suggested for individuals with limited income as a means of qualifying for a home loan. It provides an opportunity to buy a home that has a bigger price tag than the borrower would not otherwise be able to afford with a conventional fixed rate mortgage payment.

This loan method permits smaller initial interest only payments and larger payments later on when principle payments kick-in. For some borrowers, this type of mortgage is ideal. For example, someone who is just starting his or her career might reasonably expect to earn more money in subsequent years. Therefore, he or she may be able to handle larger mortgage payments set to begin at a later date.

Disadvantages of Interest Only Mortgages.

1. The biggest danger is that the homeowner may have over estimated future earning increases and may not be able to service the monthly payments when the larger mortgage payments are required.

2. Since the homeowner is not paying any principle portion of the loan, there will be no equity build up during the interest only period unless the market price of the home generally increases.

3. If the homeowner does not have sufficient income to make the adjusted monthly payment, he or she may be forced to sell the home or even face foreclosure. The dilemma will become even more traumatic if the market value of the home has diminished during the interest only period.

Summary and Viewpoint.

Interest only mortgage loans are a very dangerous loan option. The downside risks are generally greater than the initial benefit of smaller house payments. The borrower must be very confident that income will have sufficiently grown when the higher payments arrive. The most prudent of home buyers will only buy as much home as they can afford at the present time and opt for a fixed rate mortgage loan at the outset. If future wages do in fact grow, the homeowner can consider buying a new, bigger and more expensive home at that time.

Find a mortgage lender in your state that can be trusted to paint the entire picture.