Loans have become a necessity. Without them, we won’t be able to buy our dream house, get that ideal car, or move in to that bigger apartment. We try to keep our credit record clean so we can get a lower interest rate for our mortgage. And when we see an offer that says “interest-only” or “no down payment required” it’s as if we’ve died and gone to heaven. But are these mortgages really as good as they sound? Or are we in for a financial ride?
An interest-only mortgage is a way to borrow money, and pay less on a monthly basis. It may sound like a good deal, pay only the interest now (resulting in a lower monthly payment) then pay the rest of the balance later when your financial situation improves. The problem is, you may be taking on a loan that is more than your bank account can bear, and you might find yourself in a rough spot in the future.
So what happens with an interest-only mortgage? First, interest-only is not the loan itself, but it is an option that can be attached to a home mortgage. Here, a borrower only pays the interest on the principal for a set period of time. When you’re paying only for the interest, your initial monthly amortization may appear to be quite low. However, since you have not contributed any amount to your principle, the borrower is not building any equity.
Interest-only loans can be dangerous for people who cannot really afford an increase in monthly payments. Although it may sound promising to start a loan on low monthly amortizations, the balance will eventually increase as time passes. The people who are expecting an increase in salary in the future may feel confident at present, but when things don’t go as planned, this mortgage may turn from being a dream to a nightmare.
Interest-only mortgages although dangerous for the average person, are still good for savvy investors who clearly know what they are up against. People who plan to flip their homes or refinance before the interest-only period is over, may also benefit from this kind of option to a loan.
When considering loan types, interest rates, and mortgages, it is best to do a thorough review on what the mortgage really means for you now, and in the future. This will allow you to save thousands of dollars, and it won’t leave you with a loan that’s too much for your checking account.