Interest Only Loans

There are many different types of home mortgages available; fixed rate, variable rate, hybrid, balloon. One type that many people have questions about is interest only mortgage. In an interest only mortgage the monthly payment consists only of the interest due on the loan. If the borrower only pays the amount due, the principal is never paid off. In most cases, interest only loans are limited to less time than a conventional mortgage. This protects the borrower and the lender. The risks are that the lender never gets any payment against the principal and the borrower may never acquire any equity in the home.

There are circumstances, however, when an interest only mortgage makes sense. One case would be when the borrower doesn’t have a steady income. Maybe they are self-employed, or get paid by bonuses or sales commissions. The interest only mortgage would allow the borrower to have a smaller monthly payment, but could still pay down the principal when they have more money available.

Another instance would be when someone takes out a mortgage on a rental property. Instead of needing it as a long-term investment, they may want to get a positive cash flow from rentals. They would therefore need a lower monthly payment. If and when the rents or property values go up, they can refinance, or simply begin to pay against the principal without changing the terms of the loan.

Another scenario iwhen the interest only loan may be good is when the borrower is buying and selling the home for a fast gain. In that case, the buyer would need to make the initial investment as little as possible to increase the profit when the property sells, as well as minimize the risk until it does.

With all the recent troubles in the housing and mortgage industries, it has become more important than ever to be aware of the risks involved in this type of loan. From the buyer’s perspective, this loan makes sense only under a limited number of circumstances. A buyer should never allow themselves to get talked into an interest only loan. If they can’t afford the house, they shouldn’t take on the burden of a mortgage. On the other side, the lender needs to take steps to insure the borrower isn’t trying to avoid paying the principal or avoiding paying for mortgage insurance.