Interest-Only Mortgage: Should You Opt For It?

Usually, an interest-only mortgage implies that the borrower pays off the interest on the loan for an initial fixed period. Lenders approve the loans only for borrowers who have the ability to pay the interest payments back. You might dread this term and develop great apprehensions if you come to know that many borrowers lost their homes when the full mortgage amount was due. The payments became unbearable, and repaying the amount back was next to impossible for them.

For quite some time, interest-only loans faded away from the mortgage marketplace, but slowly and steadily, they are making a comeback. This time around, several provisions are in place to aid borrowers to realize the implementation of these loans and make sure that they are ready to afford them. But the borrowers must keep one thing in mind: interest-only loans wouldn’t boost up their buying power. Interest-only mortgages are rare and not for every individual. Generally, 1% of all kinds of mortgages are interest-only loans, and here are the details you should keep in mind if you want to avail an interest-only mortgage.

How Does An Interest-Only Mortgage Work?

Payments on an interest-only mortgage are lower, especially during the initial period of the loan, and they elevate during the final stages. Rates of interest on such mortgages can be compared to the standard ones. In some cases, lenders charge a higher rate of interest for this kind of loan as they can prove to be riskier than other conventional mortgages. However, you can still shell out payments on the principal amount according to your convenience. To enhance the equity and diminish the balance, many borrowers prefer to make payments on a monthly basis, while others prefer to pay occasionally or yearly. Have a detailed discussion with the lender before signing on the dotted line to verify whether a prepayment penalty can come into play.

Who Can Qualify For An Interest-Only Mortgage?

For borrowers to qualify for an interest-only loan, they need to have a review of their finances. While previously, the borrowers just needed to show their ability to repay a loan. These days, they must prove their competence in repaying back the full amount in due time. If borrowers opt for an interest-only mortgage with a rate that seems affordable to them, they must qualify on the basis of the maximum future interest rate, along with the full payment. Qualifications for interest-only loans vary from lender to lender. One might go for a 10% downpayment, while the other might charge 30%. The fact of the matter is, it’s easier to qualify for a fixed-rate loan than an interest-only one.

Who Can Really Benefit From An Interest-Only Mortgage?

Borrowers Who Are More Inclined Towards Lowering Monthly Payments: Interest-only mortgages can benefit people who are more interested in cutting down monthly payments than disbursing their loan. Such people are generally those who intend to downsize before the period is over.

Borrowers Who Have A More Inconsistent Source Of Income: A short-term cash flow is an issue where an interest-only mortgage can be best used. An individual who owns a seasonal business would prefer the option of paying the interest amount during the off-season. In any case, you should read the fine prints before opting for this particular financial product as there are certain risks associated with it.

Risks Pertaining To Interest-Only Mortgages

If you aren’t being able to structure up equity by shelling out mortgage payments, this becomes an automatic disadvantage of an interest-only mortgage. For instance, if you have been shelling out interest-only payments for the last 10 years, and the loan balance is still the same as during the time you took it out, you are on the losing side. These loans work in your favor if you are shelling out payments occasionally to build up an equity in addition to the 20% required downpayment.

Americans have thoroughly witnessed a great fall in home values during the bygone financial crisis era. Consequently, borrowers who shell out 10 to 20 percent downpayment owed more than the actual value of their property if the values took a plunge. This might pose a problem if you are contemplating a refinance and haven’t yet shelled out the principal amount. If you get a thorough knowledge of how an interest-only mortgage works, you could use it as a financial management tool too, without an inch of doubt.