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Interest Only Mortgage
Interest only mortgage loans are popular, but they can be a little scary. In a few short years, interest only mortgage loans have gone from being an afterthought to being the fastest growing loan type in America. In 2001, which was their first year of existence, interest only loans represented roughly five percent of all mortgages. Three years later, that number had grown to almost one third of all home mortgages. The climb, it seems, is being helped by people who are purchasing homes in areas where housing costs are going through the roof.
In places like San Francisco, New York City, Seattle, and other hot spots, interest only loans account for more than one half of all mortgage loans. Simply put, people who otherwise couldn´t afford the pricy down payment of even a starter home are now finding this option a viable one. Interest only mortgages are dangerous, though. In the long run, they are usually not worth the risks.
Interest Only Mortgage Loan Perks
With interest only mortgages, buyers are able to reduce their payments by paying only interest on the loan for five years. This can make sense in the short term, but almost always fails to provide any tangible benefit in the long term. If someone were to purchase a $300,000 home with an interest only mortgage at six percent, they´d be required to make a $1,500 payment each month just to cover the interest. This would save roughly 25% on the monthly payment, but at the end of the five year loan period, you will have paid $90,000 on the loan, but still owe the principal $300,000.
In that light, the interest only loan makes it extremely difficult to accrue any equity in your home. With a conventional home loan, one can build equity either through paying down the principal or because of an increase in the value of the home. When the real estate market was in an upswing, this was a good option because folks could often earn equity with the rising value of their home. Now, real estate prices have leveled out, meaning that you can no longer count on that huge bounce in the value of your home.
Interest Only Mortgage, After The Interest
After five years, the interest only mortgage loan turns into a traditional home loan, with all of the payments that you would normally start with. The only difference is that it now must be paid over the course of 25 years instead of the standard 30 years. This creates a situation where the monthly payment can jump by as much as 30%. One would also be subject to the current market interest rates, which could be higher by the end of a five year period. Now, interest rates are at a historically low level.
The interest only mortgage loan might look good on the surface, but there are too many risks to make it a viable option. This option is simply not suited for thos that are looking to buy a home. Home buyers would be better suited to sit down with their figures and a mortgage calculator in order to come up with a home loan alternative that they can afford. This will cost a little more in the short run, but paying down the principal of the loan can only benefit you down the road.