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Make Sure You Understand Those Interest Only Home Loans

 


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Many borrowers seek interest only home loans without truly understanding what they entail. Some assume the initial low payment forever remains at the stated amount. Others don't understand the ramifications of the lack of principal repayment. Before you select an interest only mortgage make sure you fully understand the terms.

For many years most all mortgages were of the same variety. They were thirty year fixed rate mortgages with even amortization over the course of the loan. Then came interest only mortgages. These mortgages allow for a lower initial payment. The flip side is a mortgage payment which can greatly increase to more than you can afford. This is obviously not a desirable outcome.

Even more tricky are mortgages with interest only payments entailing a very low starting “teaser rate". This is an extremely low interest rate given to the borrower for a short period of time during the first stage of the mortgage. Then, the interest rate goes up severely. Some teaser rate loans have increased from 1% to over 15%. These are generally traps ending in a foreclosure.

Unfortunately, many unknowingly took out these teaser rate loans. The fact that they adjust significantly higher was buried in the fine print. Failure to read and understand all terms in a mortgage is a recipe for disaster. A home is most often the largest investment of your life. It is worth the extra time to research and fully understand the terms of your mortgage.

With all interest only mortgages you do not pay down any principal until the interest only period ends. This can prove to be harmful. Having equity in your home can serve as a nice safety cushion. Additionally, should interest rates decrease into the future you might need that equity in order to successfully refinance into a lower rate.

In some scenarios an interest only mortgage is wise. If you know you will only own the home for a limited time, such as under three years, then an interest only loan can serve to save you money. However, you must be fairly certain you are not going to own the home for any significant duration. Should this happen and your rate increase it could put you in a position not to be able to afford your mortgage payment.

Those in the business of buying, rehabilitating then quickly selling houses see their returns on investment go up when using these instruments. Just like many objects, an interest only loan can be a great resource in the hands of some while being a dangerous weapon in the hands of others.

Those reviewing mortgages of any type need to become educated on the process and all underlying terms. Interest only home loans especially should be scrutinized. Exercise care and caution when making the largest investment of your life. A few paragraphs within the mortgage documents could contain words which might seriously impact your life sometime down the road. Do yourself a favor and become a smart mortgage borrower.

Make sure you understand the details of any interest only home loans . For more, visit http://www.MortgageLoans-101.com where you'll find this and much more on your mortgage loan needs.

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