Is An Interest Only Mortgage A Good Idea
Is an Interest Only Mortgage A Good Idea? - Recently there has been a lot of press around "non traditional" loans, including interest only loans. Many people are worried that people might get themselves into trouble with these types of mortgages. As with any type of mortgage, there are situations where an Interest Only loan is the right fit for a particular situation.
Many types of mortgages include interest only options. You can get an interest only loan that is a fixed interest rate for 30 years, or choose one with a 1% or even lower minimum payment option as well.
Property rehab investors love Interest Only Mortgages as they typically plan on keeping the property for a short time while they renovate or replace the home.
I always recommend that if you plan on keeping a property or mortgage for 3 years or longer, not to get involved with an interest only mortgage.
An interest-only mortgage might be a good fit for someone whose income is mostly in the form of infrequent commissions, bonuses, or investment cashflow.
Another scenario which may be good for an interest only loan is for someone who will invest the savings on the difference between an interest-only mortgage and an amortizing mortgage, and who is confident that the investments will make money to off-set the risk involved with this type of mortgage.
Mortgage loans with "Interest Only" features are often used by home buyers who look to buy more home with a smaller monthly payment. Because "interest-only" mortgages require repayment of only the interests accrued for the prior month, and no repayment of the principal portion is required, home buyers can qualify for a bigger loan amount with the same monthly payment.
Important information about Interest-Only loans - INTEREST ONLY LOANS
Important things to know
Interest-Only loans have risks that other loans do not have. This information can help you decide if an Interest Only loan is right for you.Never sign any loan document unless you are sure you understand it.
• Your Monthly Payment Will Not Reduce the Amount You Owe. An Interest-Only mortgage allows you to pay only the interest on the money you borrowed for the first years of the loan. This is called the “interest-only period” (for example, the first 5 years of the loan). During the interest only period, your monthly payments will not reduce the amount you owe on your loan. In other words, at the end of the interest only period, you will owe the same amount that you did at the start of your loan unless you make additional payments to reduce the amount you owe.
• Your Monthly Payment Will Increase. On some adjustable rate Interest-Only loans, your payment amount may change during the interest only period because the interest rate has changed. No matter what type of Interest-Only loan you have, your monthly payment amount will change at the end of the interest only period. Even if interest rates stay the same, your new monthly payment will be higher unless you have made additional payments to reduce the amount you owe. Your monthly payment will be higher because:
o You will have to start paying back principal as well as interest.
o On adjustable rate Interest-Only loans, interest rates may have gone up.
What the payments on your loan will be after the interest-only period.
What the payment can be if interest rates increase (if you are considering an adjustable rate Interest Only loan).
With most interest only loans you can pay additional money that is above and beyond your minimum monthly interest only payment each month. With most interest only loans, this extra money paid will be applied directly towards the principal balance of your loan. This in turn will reduce the overall loan balance every time you pay extra. Interest only loans can be excellent financial tools when used properly. Consult a mortgage professional to see if this type of loan is right for you.
If you are sending additional money to be applied to principal, MAKE SURE the lender knows it's supposed to go towards principal. Some lenders will apply the extra money to your escrow account, which does not reduce your principal balance.
With an interest-only loan your monthly payment will be slightly lower. However, your interest rate will be slightly higher. Therefore, the interest you pay over the life of the loan will be higher.
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Information listed above is to be used for educational purposes only and is not guaranteed