If you are a considering using an interest-only mortgage to finance your home, it is important to understand the risk involved with these mortgages. Interest-only mortgages are dangerous because they allow you to qualify for more mortgage than you can actually afford when the interest only period ends. Here is what you need to know about interest-only mortgages to avoid losing your home.

There are advantages to financing your home with an interest-only mortgage, at least initially. Interest-only mortgages give you a low monthly mortgage payment and the largest mortgage interest tax deduction. The thing many homeowners with interest only mortgages neglect to realize is that interest-only mortgages are not interest-only forever; at the end of the interest-only period the mortgage lender will add the principle back into your payment and adjust the interest rate. When this happens the monthly payment amount will go up significantly.

Interest-Only Basics

Interest-only mortgages are interest-only for a period of time specified in the loan contract, usually five years. At the end of the interest-only period the mortgage reverts to an adjustable rate mortgage amortized with a term five years less than a typical mortgage. What does this mean for your payment amount? The monthly payment will be higher because you now have five years less to pay back the same amount of loan. Adding insult to injury the mortgage lender will adjust the interest rate to whatever financial index your loan is tied to and add their premium markup at regular intervals.

Interest-only mortgages were intended as a short-term fix to a financial need; many homeowners abuse these mortgages because the don