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Interest Only Mortgages
Interest-only Mortgages
With most home loans, your monthly mortgage payment will include principal and interest. An interest-only loan is different because you will pay only the interest on your mortgage for a set amount of time, usually five to 10 years. During this time, the principal will remain unchanged.
This type of loan can allow you to buy a home that is more expensive than you could otherwise afford with a standard loan.
The following are people who usually consider an interest-only loan:
- Buyers who own investment property
- Buyers who are comfortable with the idea that their payment will go up when the interest-only term ends
- Buyers who are self-employed, make a large down payment and maintain a high account balance
- Buyers who prefer investing their money elsewhere, instead of locking it into a house payment
- Buyers who prefer a low payment to building equity
- Buyers who are sure their income will go up in the next few years, but want a more expensive home now
Interest-only Mortgage Drawbacks
While this loan option can make sense for some borrowers, it is not for everyone. Interest-only loans do not amortize, so you will quickly find yourself underwater if home prices drop. You can guard against this by putting down a large down payment for instant equity.
The monthly mortgage payments can also rise a great deal after the interest-only period ends, so you will need to be sure you can afford larger payments that include principal. Remember that you may find it impossible to refinance your loan later if home prices do not rise and you lack equity.
New Mortgage Rules
Interest-only home loans became very popular during the height of the housing bubble, and they are still popular today among well-qualified buyers. Before you apply for an interest-only loan, it is important to understand how new mortgage rules that went into effect in January 2014 impact this loan option. Interest-only mortgages are excluded from Qualified Mortgage status, which is designed to protect lenders against liability if borrowers default. This means you will only get approved for the loan if you are very well qualified with substantial assets and a significant down payment.
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