Interest Only Mortgage Loans - Understanding the Risks Before You Borrow

Interest only mortgages can be an excellent tool for a short-term financial need. It is important to know what you’re getting into with an interest only loan before you borrow. Here are several tips to help you keep you out of trouble when financing your home with an interest only mortgage.

Traditional mortgage loans have monthly payments that are amortized for the entire duration of the loan. This means every month that you make a payment, part of that payment is applied to your finance charges in the form of interest, and part is applied to pay down the principle loan balance. Interest only home loans are different than traditional mortgages in that they do not have fully amortized payments during the interest only period.

Interest Only Mortgage Payments

For the first part of your mortgage loan, the interest only period specified in your loan contact, your monthly payment is based solely on the amount of interest due that month. Because there is no loan principle included in your payment amount, interest only payments are much lower than traditional mortgage loans. Savvy homeowners can use interest only payments to meet a short term financial need; however, problems arise when homeowners that do not fully understand interest only mortgages use them for the wrong reasons.

Disadvantages of Interest Only Mortgages

Many homeowners use interest only mortgages to purchase their homes because of easy qualification and low payments. Many of these homeowners don’t realize the interest only payments only last for a short period of time. At the end of the interest only period the lender converts your loan to a standard Adjustable Rate Mortgage and will add the loan principle back into your payment. When this happens your entire loan balance will be amortized for the remaining duration of your loan. Suppose you took out a 30 year interest only mortgage for $250,000 with a five year interest only period. At the end of the interest only period your payment will be based on paying $250,000 back over 25 years. This results in a significantly higher mortgage payment.

You can learn more about your mortgage refinancing options including costly mistakes to avoid by registering for a free mortgage tutorial.

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Louie Latour specializes in showing homeowners how to avoid costly 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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Interest Only Mortgage Refinancing

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