Interest - Only Mortgages
Why use an interest-only mortgage
Drawbacks to an interest-only mortgage
Some mortgage companies now offer interest-only home mortgages as a tool to allow buyers in to a more expensive home. The homeowner does not build any equity during the interest-only phase of the loan.
Typically, the interest-only portion of the home loan lasts for about 5 years. At that time the loan reverts to an interest bearing instrument and is usually amortized over 25 years, rather than the usual 30 years.
Because borrowers are qualifed using the amount of the interest-only payment, they are able to purchase a more expensive house for the same payment.
Why use an interest-only mortgage?
This is a way to "tie up" a home, live in it, and get full benefit of ownership without paying a full mortgage payment. It is, essentially, a rental without a landlord.
This loan can be beneficial to you if housing prices are rising and you will build equity through appreciation. It can also be beneficial if you are likely to see a steady increase in your income over the next few years. By the time your loan reverts to full amortization, you'll be able to afford the larger payment.
This is also a good choice for an executive whose main income is from bonuses received once or twice a year. This individual can then apply large chunks of cash to his or her home mortgage loan when the money is available, rather than pay more each month.
Business owners whose income fluctuates from month to month can also benefit from lower monthly payments and the option of paying down the principal when a large amount of cash is available.
Investors can also benefit. If the few hundred per month saved on a house payment can be put into a high-yield investment, smart investors could actually pay off their home mortgages years ahead of time with the investment money earned.
Many borrowers who want a smaller cash outlay for a year or two go into an interest-only loan with the intention of refinancing before the loan rolls into full amortization.
Handled well, and used for a good reason, an interest-only home mortgage loan can be beneficial. Handled poorly, and for the wrong reasons, it could be a financial disaster.
Drawbacks to an Interest-only Mortgage
Because the borrower is not gaining any equity during the interest-only phase of the home loan, this kind of home mortgage loan poses risks.
If income does not increase during those first few years, the new high mortgage payment may be a financial hardship - sometimes even causing borrowers to lose their homes.
If the housing market takes a downturn, refinance may be difficult, and a sale to cover the balance due could be impossible.
This is a home loan that should be used only for a good reason and with a financial plan in mind. Your Mouse House Mortgage consultant can help you decide if this is right for you.
Mouse House Mortgage is a free service for people who are looking for a
mortgage loan with favorable rates, whether you have excellent credit or bad
credit. A friendly mortgage advisor will help you navigate your options and
access the best mortgage rates for your situation.
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