Interest Only Mortgages
Interest only mortgages are a type of loan product that requires the borrower to only make interest payments on the principal loan amount for a certain period of time. On average, an interest only mortgage will last from 2 to 5 years. After this initial period the borrower will be required to make full payments on the loan that include interest and principal payments.
This type of loan is a good product for investment property buyers. If you are purchasing a property that you intend to resell or “flip” quickly, an interest only mortgage will save you money during the selling process. Minimal payments will be made each month by the investor until the property is resold. At that time the mortgage will be repaid and any additional profits will be the investors to keep.
However, if there is any fluctuating in the housing market during that period, the investor may be stuck with a loan they cannot afford once the principal amount is added to the interest payment each month. An investor should be positive they can turn the property over to another buyer in the required period of time.
Homeowners that know that they will not be in their home for more than five years will benefit from this type of loan. Many people find themselves in a work situation that requires them to move about the country. When you are in this type of work condition an interest only mortgage can keep your payments low while you are in the transitional period.
First time buyers are often able to purchase larger homes using this type of loan structure. This is very risky. While the temptation to purchase a large home is great, the loan payment will eventually rise and many of these homeowners then find themselves unable to pay. This is thought to be one of the main reasons for the current housing crisis.
When used strategically and logically, an interest only mortgage can provide you the perfect option to keep your housing cost low. Investors will benefit from using this loan product as a way to reduce investment costs as they resell the properties. Homeowners can decrease monthly expenses if they are sure that they can afford the larger payment once the interest only period is over.