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What are The Danger of Interest Only Mortgage

By Edited Feb 11, 2016 1 6

Interest Only Mortgage

Why Interest Only Mortgage

Owning a home is part of the everybody dream. But high home prices may make this dream out of reach. To make this dream more affordable, many lenders offer home loans that allow you to

(1) pay only the interest on the loan during the first few years of the loan term.

(2) make only a specified minimum payment that could be less than the monthly interest on the loan

In this type of mortgage you only pay the only interest on the mortgage through monthly or bi-weekly payments. The term is usually between 5 and 10 years. When term is over, you can refinance your home, make a lump sum payment, or they begin paying off the principal of the loan. However, when paying the principal, payments will significantly increase. In interest-only option is like a renting a house which you will live in your will be never be yours.

If you decides to use the interest-only option, each month during the interest-only period your payment will go towards the principal. The loan balance will actually remain unchanged.

If you wanted to borrow $200,000.00 for the purchase of your home, you might be offered a standard loan with a 5.000% interest rate or an interest only loan with a 4.000% interest rate, with both being 30 year loans. With an interest only loan, your monthly payment would be $666.67, while a standard loan would be $1,073.64. Under this plan, the total interest only cost would be $240,000.00, while the total standard loan cost would be $386,511.57. So see the difference between two payments of about $407.

Who should get Interest only mortgage?

-Can afford to buy more than one home.

-home you buy will be needed to be sold within a short time period.

-Wanted your initial mortgage payment to be lower

-benefit of lower Interest only mortgage

The advantages of having an interest ony mortgage loan are:

-Yours initial monthly payments are low during the term.

-You can purchase a larger home later by qualifying for a larger loan amount.

-Using this extra money for buying more investments.

-Getting the Benefit of tax-deduction as these interest only period monthly payment qualifies for same

- The Interest Only mortgage tends to be more portable so those who want to move their mortgage from property to property as they sell and move on may find it easier to do with an Interest Only mortgage.

Drawbacks/Pitfalls of interest-only mortgage:

  1. Interest-only mortgages typically have higher interest rates than mortgages without the interest-only option. This is some times hidden because most interest-only mortgages are adjustable rate mortgages which typically have lower interest rates than fixed rate mortgages. Borrowers need to be very careful to do an equal comparison of interest rates.
  2. You can use this extra money from lower Interest mortgages on investment instead paying higher intrest.
  3. An anticipated increase in income may not cover the higher monthly You aren't building wealth for yourself.
  4. You aren't building wealth for yourself.
  5. You will have increases risks of rising mortgage rates.
  6. You won't increase equity that you could borrow against later with a second mortgage
  7. You may have to write a check to sell it if your home loses value
  8. You may not afford principal payments when the time arrives and also not disciplined enough to pay extra amounts of money toward the principles.
  9. Your income may not grow as quickly as planned.
  10. Your home may not appreciate as fast as you would like.

Choosing an interest only loan for the sole purpose of buying a more expensive home is a very bad idea. If you really want to buy new house read this article -New Dream House



Aug 27, 2010 2:40pm
everyone buying a house for the first time should read this article! Great article
Aug 27, 2010 2:55pm
sookie-thanks for nice comments.
Aug 27, 2010 6:19pm
Very good info on the dangers of interest only mortgages.
Aug 30, 2010 9:16am
lynsuz-thanks for nice comments
Sep 20, 2010 7:42pm
It is great to warn people of the pitfalls of interest only mortgages. They can be very risky!
Sep 24, 2010 11:34am
deborah-Thanks for nice comments
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