What You Should Know about Interest Only Mortgages

Many consumers are not familiar with the concept of an interest only mortgage.  Once a fairly common approach to home financing, this loan type does provide some significant benefits to qualified homeowners as well as some potential liabilities. Here is some information and ideas on when this loan strategy may be right for you as well as what you should know about interest only mortgages.

What is an Interest Only Mortgage?

What You Should Know about Interest Only Mortgages The structure of this type of mortgage option is very straightforward. Like other mortgages, an interest only loan calls for retiring the debt over a specified period of time. What is different is that for a set term on the front end of that financing period, the debtor only pays the interest assessed on the loan. During that term, the interest rate applied to the balance is usually fixed.

For example, if you take out a 30-year mortgage with an interest only term of 10 years, those 10 year mortgage rates will not change. Depending on the other terms and conditions of the loan arrangement, the interest rate could change to a floating or variable rate, or simply switch to another fixed rate.

Who Qualifies for This Type of Mortgage?

Qualifying for an interest only mortgage can be difficult. This is because lenders are assuming a little more risk on the front end of the loan, especially in areas where the market value of real estate is not particularly stable. Lenders will usually require that applicants have a steady job with an income that is in line with other debts they are currently managing.

In addition, lenders will look closely at credit reports to determine if there are any indications of possible over-extension based on current credit lines. For someone who has a stable job, a clean credit report and is not carrying a lot of unsecured debt, there is a good chance of being approved.

Why Would I Want an Interest Only Mortgage?

Buyer Tips: What You Need to Know about Interest Only Mortgages One of the chief benefits of this type of mortgage is the ability to enjoy lower monthly mortgage payments during that interest only term. For first time home buyers who are just getting established in their careers, this means the chance to put keep expenses lower for now, and take on the larger mortgage payment after they are earning higher incomes.

One strategy that is commonly employed is to refinance the remaining balance once the interest only term expires. This can make it possible to lock in a more competitive rate, presuming that the owner has built up a solid credit rating over the years and is considered a good risk by other lenders.

What About Drawbacks to this Type of Mortgage?

Interest only mortgages are not a good fit for everyone. Serious issues can arise if you have reason to believe the value of your property will decline over time. In like manner, this arrangement can be very difficult if you should lose your job and not find new employment in a short period of time.

Another drawback is the fact that homeowners don’t built equity during the interest only term. This can mean considerably less profit if you decide to sell the house before that term is fulfilled.

Are Interest Only Mortgages Hard to Find?

Not all lenders provide mortgages of this type. There are a number of mortgage companies that offer interest only loans, as well as a few banks and finance companies. A good place to begin the search for this type of mortgage arrangement is with your local banker. If the institution does not offer this particular option, the banker may be able to identify another institution that does. You can also conduct online searches to find reputable lenders in your area.

About Anita Clark Realtor

Anita Clark has written 607 posts on this blog.

Anita is a residential Real Estate Agent in Warner Robins Georgia, with Coldwell Banker Access Realty (478) 953-8595, aiding buyers and sellers with all their real estate questions on her Warner Robins blog.