Interest Only Mortgage

There are different types of mortgages that are very popular. One of the most popular ones is the interest only mortgage. However, homebuyers are now alarmed from the news going around, saying that an interest only mortgage is too risky. Why is this so?

What Is An Interest Only Mortgage?

An interest only mortgage is a type of loan that is secured by a real estate that contains options on whether the buyer prefers for an interest payment or not. Generally, the interest only mortgages do not have principal amounts. Most of the interest only mortgages that is available today features options for an interest-only payment.

There are two common types of interest-only mortgages—the thirty-year loan and the forty-year loan. These types of mortgages specifically do not allow the borrowers to have interest-only payments forever. The time period is usually limited from the first five to ten years of the borrowers’ loan. After the said period, their loans will then be amortized to see the remainder of their specific term. This means to say that the payments will rise to an amortized amount. However, its loan balance will still remain as it is.

The thirty-year interest only mortgage loans give the borrower the options in making interest-only payments from the first sixty months of the term. Let’s say you borrow two hundred thousand dollars with an interest of 6.5 percent, you have the option of paying one thousand eighty-three dollars in a month, anytime within five years. After the first five years, your payment will then be $1,264. The forty-year loans on the other hand, give you options of making interest-only payment for the very first 120 months of your loan.

Who Takes Interest Only Mortgage?

An interest only mortgage is very beneficial for the first-time homebuyers. It is noted that most of the new homeowners are struggling during their first few years of ownership because in the first place, they are not that accustomed of paying for mortgage payments, which are undeniably a lot more expensive than the rental payments.

The interest-only mortgage specifically will not require a homeowner to pay interest-only payments. What this type of mortgage does is simply to give the borrower an OPTION of paying lower payments during the earlier years of their loan. By exercising options of paying affordable monthly payments, homeowners can somehow learn how to balance their home budget.
Other people who can benefit much of an interest only mortgage are those that has incomes that periodically fluctuate because of their earning commissions. These borrowers can pay their interest-only payment during their not-so-productive months and can relatively pay extra towards their principal once they have their commissions or bonus on hand.

The Risks Closely Associated With An Interest Only Mortgage

One important aspect to consider about an interest only mortgage is that it is never true that the loan balance increases. The risks associated lies when a borrower will not be able to pay the property; the property is forced to be sold especially if it has not appreciated its value. If a borrower can only pay for the interest in each month, after five years, the borrower still owes the original balance of the loan because the value is not reduced. The balance of the loan will still remain as when it was originated.

If you can observe, preferring for the interest only mortgage is not really that risky contrary to what most people believe. Like any other type of loan, some risks like foreclosure of a property, should be expected, once due payments are not made on time.

On a positive note, this type of mortgage is indeed practical for those who are just starting to have their own home. A home is one’s greatest investment. That is why; it is but normal for the first time homebuyers to have a mortgage loan that is just right for them. Incidentally, the interest only mortgage is the perfect one for them.