Interest Only Mortgages
By Sherril Steele-Carlin
Interest only mortgages have become all the rage in the past few years, especially in areas where house prices are exceptionally high. Interest only mortgages can work for some people but home buyers should understand all the angles of these mortgages before they buy.
What is an Interest Only Mortgage?
These mortgages allow the homebuyer to pay interest only on their mortgage for the first 5, 10, or even 15 years of the loan. Then they begin to pay principal in addition to interest. They allow homebuyers to afford more house for the money, and help them save money during the initial period of the loan. However, when it comes time to begin paying principal and interest, the payments can often be too hefty for the homeowner to manage.
Who Benefits from These Mortgages?
Some borrowers will indeed benefit from these types of mortgages. They are a good bet for young buyers who expect to earn much more income in a few years. They are also great for buyers with enough will-power to really bank the savings they'll enjoy from an interest only loan, and then use this savings to pay down the principal of the loan when the time comes. Business owners may also benefit from these mortgages because they help them manage cash flow and many loans allow paying down principle when cash flow is high.
Who Doesn't Benefit from These Mortgages?
These mortgages are a bad idea for people who don't have an idea of how to invest their savings and make them grow so they have the capital for future payments. Most buyers who plan to stay in their home for many years will not benefit from these types of mortgages. In fact, the interest rates usually jump at the end of the interest only period, and so, payments can end up higher than they would have been had the buyer chosen a traditional mortgage in the first place. If the payments rise higher than the buyer's income, they may have difficulty making the payments, or worse, they might even lose the house if they cannot keep up with the steeper payments.
The Bottom Line
As with most financial decisions that can last a lifetime, some people will benefit from interest only mortgages. Others will not. As they become more popular, people pondering this type of mortgage should make sure they understand all the options, interest rates, and penalties that apply to these types of mortgages. They can be a blessing for some buyers and a nightmare for others. Shop around, find a mortgage lender you trust, and then, think hard before you sign on the dotted line.