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Interest Only Mortgage  

Most of us understand what mortgage interest rates are and how they work, but what many people don't realize is that there are mortgage programs out there that allow you to only pay interest in order to keep the payment down each month.  To better understand what interest only mortgages are, and why you would want to have one, let's go over them in greater detail. 

An interest only mortgage is very common on adjustable rate mortgages and on mortgage refinancing options such as a HELOC or second mortgage.  These loans basically have a time period that allows the buyer to pay interest only on the loan.  After the pre-determined time of paying interest is over, the loan must be paid in full.  Most of the time these periods can be 10-15 years,  but there are some mortgages out there that are as short as 5 years.  So why would a person only want to pay interest on a mortgage instead of putting money towards the principle? 

When getting this type of loan on a mortgage refinance, it can be very beneficial to get this type of loan as it allows you to have access to the equity in your home without having to pay a huge payment each month to use it.  The best situation for this type of loan is if you need some money for a short amount of time, but plan on paying it back quickly.  By having this type of loan, you can use the money that you need, pay it off quickly, and not have to pay so much to the bank as you would a normal mortgage.  While these interest only types of mortgages used to exist as a bad credit mortgage product several years ago, they primarily exist as second mortgage options.    

One of the main reasons for this is that many people got in over their heads and could not pay back a 1st mortgage when the time came due, which is why these mortgages are primarily only offered as second mortgage programs.  Since second mortgages are usually always less money than a first mortgage, many people take advantage of these interest only loans when getting mortgage refinancing, or when needing a second  mortgage to pull equity out of their home to use for different things.  The most common interest only free loan is that of a HELOC, which basically makes the equity in your home work like a credit card. You only pay interest on the money you have used, and if you don't use any money at all, you pay nothing.  

 

  10 Steps to Home Ownership:

Step 1: Are You Ready?

Step 2: Hire a Realtor

Step 3: Get Loan Pre-approval

Step 4: Search for Homes

Step 5: Choose a Home

Step 6: Obtain a mortgage

Step 7: Make an Offer

Step 8: Insure Your Home

Step 9: Close the Deal

Step 10: Avoid Foreclosure

 

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