What are the cons of an Interest Only mortgage loan? |
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Answer:
Of course there has to be some cons associated with The benefits of an Interest only loan are that they lower your monthly mortgage payment which means you can buy more house for your money. With a standard fixed rate mortgage you may only be able to afford a $300,000 home but with an interest only home you can afford a $350,000 home. You don't pay down the principle with an interest only loan. So if you purchase a $300,000 home eventually you will pay down a portion of the $300,000. In 10 years, you may only owe $200,000 on your home which is now worth $450,000 a gain of $250,000 or $250,000 in equity. With an interest only loan you would still owe $300,000 on the home after 10 years. Fixed rate mortgages involve amortization tables and interest only loans do not. So obviously with an interest only mortgage loan you won't cut into the principle of the home. Even with a fixed rate mortgage the principle of the mortgage isn't paid down until several years into the loan so if you plan on living in a home for a long time an interest only mortgage might not be the right choice. People are getting interest only loans because they allow you to purchase more home than you would normally be able to afford. This can cause problems if home values fall and you need to move. If values fall below what you paid for your home and you need to move it's likely you will be upside down in your home and the lender will still want the total amount for the original loan. If you buy a home for $300,000 and pay only interest and 2 years later you sell the home for $275,000 then you'll be upside down $25,000. Interest rates for Interest Only home loans are usually higher than fixed rate home loans. It's easy to figure an interest only payment, take the amount of the loan, multiply it by the interest rate and divide that figure by 12 months. This will give you a monthly interest only payment. People need to understand when a mortgage product is more beneficial over the other. Each circumstance is different but for the most part if you would like to buy a bigger home in an emerging market and only plan on being there for a set few years then an interest only mortgage is a good option. Anything other than that situation should be considered risky. Trackback(0)
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