Are there ever any situations where interest only mortgages are a smart choice? There are situations where an interest only mortgage could save you from losing your home. Here are smart ways to use interest only financing.
Interest only mortgages have one virtue: low monthly payments. The problem with an interest only mortgage is that you build no equity in your home; the mortgage lender is going to eventually want the principal balance repaid. This means a balloon payment or a significant increase in your monthly payment down the road.
When is an interest only mortgage a smart choice?
The obvious answer to that question is for the real estate investor. Interest only mortgages allow investors to flip homes while minimizing out of pocket expenses. This also holds true for the homeowner in need to temporary financing to secure a property. For any short-term situation that requires minimum monthly payments without the need to pay principal, interest only mortgages are a good choice.
If you find yourself in a situation where your cash flow is sporadic and need to make smaller payments, an interest only mortgage could be a temporary fix to the problem. This could be due to a temporary loss of part or all of your income due to illness or loss of employment.
Interest only mortgages should only be used as a short-term solution to a financial need. Abusing interest only mortgages could result in a financial nightmare and ultimately losing your home.
Louie Latour has twenty years of experience in the mortgage industry as a mortgage broker. He is the owner of Mortgages Refinance Advisor, a mortgage help site devoted to saving homeowners money with a free guidebook