If you are considering an interest only mortgage you need to understand the risks associated with these mortgage loans. Here are the basics of interest only mortgages.
An interest only mortgage is as the name implies a mortgage loan where the borrower makes interest only payments. There are short term reasons for using interest only mortgage loans. Real estate investors that need short term financing while flipping a property can use interest only mortgages to get the lowest monthly payment while finding a buyer for their property. Homeowners with short-term financing needs can also benefit from interest only mortgages.
Keep in mind that interest only mortgages are not interest only forever; at some point the lender is going to want payment for the principal loan balance. When this happens the monthly payment could go up significantly or even result in a balloon payment requiring the homeowner to refinance the mortgage.
The trouble with interest only mortgage loans comes from the fact that it is very easy to qualify for more mortgage than you could afford with a traditional mortgage. Many homeowners get into trouble by purchasing homes they cannot afford and floating the financing with an interest only mortgage. This is fine while interest rates are low; however, when rates go up or the lender requires payment on the principal loan balance, many homeowners can quickly find their monthly budgets stretched to the limit.
These overextended homeowners will then try and refinance their interest only mortgages only to find that their income is too low and their debts are too high to qualify for financing. Many are able to keep their mortgage afloat by selling off their possessions and raiding their 401k plans; however, without a new mortgage these homeowners are destined for foreclosure if they are unable to sell the home.
If you are planning on using an interest only mortgage or an ultra-risky option mortgage, make sure you know what you are getting yourself into. Do not purchase more home than you can afford and do your homework first. To learn more about staying out of financial hot water with interest only mortgages, register for a free mortgage guidebook.
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Louie Latour specializes in showing homeowners how to avoid common mortgage mistakes and predatory lenders. For a free copy of "Mortgage Refinancing - What You Need to Know," which teaches strategies to find the best mortgage and save thousands of dollars in the process, visit Refiadvisor.com.
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