 A
"Interest only
Mortgage Loan
Program "
products are an easy
way to save money
and are a very
popular alternative
to traditional fixed
rates but they are
not without risk. An
"Interest Only"
loan can offer
consumers greater
purchasing power,
increased cash flow
and a number of
other benefits which
are listed later in
this article.
First let us start
with a quick
explanation of how
the product works.
With Interest only
loans the borrower
has the flexibility
of paying only the
interest due on the
mortgage. Most of
these products allow
you to pay extra if
you choose.The
positive aspects of
these loans are as
follows:
- They work
well for
borrowers that
are restricted
by a tight
budget, and the
savings can be
as much as
$300-400 per
month!
- "Interest
Only" loan can
allow you to
qualify for a
bigger home. If
the underwriter
considers only
the "Interest
Only" payment,
you may be able
to upgrade to a
nicer or larger
home.
- This type of
loan works well
for people who
only want to
stay in a home
for a just a few
years. During
the first couple
of years with a
conventional 30
yr mortgage,
most of your
mortgage payment
is being applied
directly to the
interest of the
loan.
- If you want
to stay in the
house for only
3-5 years, an
"Interest Only"
loan may be the
right loan for
you. You can
receive a lower
payment and have
almost the same
principal
balance as the
borrower who
chose a 30 year,
conventional
mortgage if you
choose to sell
in 3-5 years.
- You want to
buy a very
expensive home.
Most people who
buy very
expensive home
have no desire
to pay off their
home completely,
and the rate of
appreciation on
the house is
usually very
good. An
"Interest Only"
loan allows
these borrowers
to deduct their
interest
payments, and
the money they
save can be
directed to
other
investments.
- You want to
buy a rental
property. The
lower payment
can help improve
cash flow on a
rental property.
As with every
loan program, with
positives there are
always negatives:
- You are not
paying down your
principal on
your mortgage.
If your property
doesn't
appreciate in
value over those
3-5 years, you
may even have to
pay money if you
choose to sell
the home. While
the likelihood
of this
happening is
high, it is a
risk that must
be considered
when thinking
about using
“Interest Only”
loans.
- Most
"Interest Only"
products have a
specified term.
For example, on
most 30 year
fixed "Interest
Only" loans,
most lenders
allow interest
payments for 10
years, and then
you must repay
the loan during
the last 20
years. This loan
now must be
amortized over a
20 year period,
and this will
carry a higher
payment than a
30 year fixed
mortgage. These
loans may be a
good option for
you as a
borrower, but
each person's
situation is
unique. Lastly,
we are in a
period of
incredibly low
fixed rates.
- While
"Interest Only"
products are
very attractive
right now, if
you are planning
on staying in
your home for an
extended period
of time, I would
look strongly at
a traditional
fixed product.
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