Finance Articles

The Interest Only Mortgage

In recent years, interest only mortgages have soared in popularity. With housing prices skyrocketing, many potential buyers found that they could only afford to get into the house of their dreams by choosing an interest only mortgage. This situation is especially true in regions of California, and in the Northeastern United States, where housing prices are among the highest in the country.

What is an interest only mortgage? Just as the name implies, you pay only the interest on your mortgage loan for a specified period of time. This time period is usually five to seven years. After that, you can choose either to refinance at current interest rates, pay off the entire balance with a lump sum payment, or begin paying the principal along with the interest which will mean significantly higher monthly payments.

The risks of financing with an interest only mortgage are obvious. You will be paying for several years without reducing the principal amount of your mortgage, or building any equity in your home. In addition, there's a fair chance that you may not be able to afford the higher payments after the initial term is up. Also, should housing prices drop, you could find yourself owing more than the house is now worth.

While interest only mortgages may come in handy under the right circumstances, they are not for the average person.

For example, should you expect your income to rise significantly before the payments increase this type of mortgage may work for you. Someone in medical school may need to keep their payments as low as possible. They know that after graduation their salary will be more than enough to cover the addition of principal to the payments.

Perhaps the owner of a new business, that is just getting off the ground, needs all the available cash that can be had. Should the business owner be confident enough that in a few years the business will be successful and the income will increase, may find this type of loan beneficial.

Some others who may benefit from interest only mortgages would be salesmen, or executives who are paid by commissions, or bonuses. The lower mortgage payments can help them through the dry times. And they can make payments on the loan principal upon receipt of the commissions, or the bonus.

Still others may choose an interest only mortgage so they can take the money saved and use it for investing. They may believe that the return on their investments will be enough to justify the risk that they are taking. However, should their investments not turn out as they had planned, they could find themselves in financial trouble.

Should none of these specific situations apply to you, and perhaps even if they do, always be wary of interest only loans. Even if it presents the only way to purchase the house of your dreams. Remember, should you miscalculate, it can turn into a financial nightmare.

Carl DiNello is an Article Author, Researcher, and Wesbite Owner whose articles are featured on websites covering the Internets most popular topics.

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