Are Interest-Only Mortgages a Good Idea?

Are Interest Only Mortgages a Good Idea- 150x150An interest-only mortgage is a type of loan in which the borrower is required to only pay the interest on the principal for a predetermined amount of time. When the term of the interest-only mortgage comes to an end, the borrower can either renew the interest-only mortgage or pay off the loan through conventional means, such as a regular mortgage. Conventional mortgage loans require you to pay interest and part of the principal each month, which makes interest-only mortgages a more attractive choice for those who can’t afford a large mortgage payment for the time being.

Popular interest-only mortgage loans don’t allow the borrower to make interest-only payments for a long time and are usually limited to a three to ten years period of interest-only payments, after which the borrower starts making payments towards the principal as well, which will increase his or her monthly payments.

Advantages and Disadvantages of an Interest-Only Mortgage

Like most mortgage loans, interest-only mortgages have their advantages and disadvantages, which means that only home buyers with a certain financial situation will benefit from this type of mortgage, while others will probably benefit from a more conventional type of loan. The most important advantages and disadvantages of an interest-only mortgage loan are:

  • Low monthly payments in the beginning. While conventional mortgage loans require each monthly payment to go towards paying both the interest and the principal, interest-only mortgages allow the borrower to make only interest payments for the initial period of three to ten years. This will result in much lower monthly payments for the duration of the initial period, which makes this type of mortgage loan more attractive for first time buyers and people or families who are expecting an increase in their income within the next few years. With this type of loan, you are able to buy a home even if you don’t have a large income at the time. However, once the initial period is over, you must be able to afford larger mortgage payments as you have to start paying off the principal as well.
  • High monthly payments later. When the interest-only payment period ends, the amount that you will have to pay on your mortgage monthly may increase significantly because you will start making payments towards the loan principal as well. Home buyers who aren’t prepared will face the risk of not being able to afford to pay their mortgage anymore. The duration of the interest-only period has a large impact on how much your monthly payments will increase. The longer the initial period, the higher your mortgage payments will be once the second repayment period begins.
  • You can qualify for a larger mortgage loan. When applying for a mortgage loan, the amount that you can borrow is closely related to your income, and how much the lender determines that you can afford to pay monthly. Because monthly payments are lower on an interest-only mortgage loan than they are on a conventional loan, you will be able to borrow more.
  • You will have to deal with an adjustable interest rate later. Interest-only mortgage loans start out with a fixed interest rate, but the rate will become adjustable later on when the second period starts or even earlier. If the interest rate decreases, you’re in luck because your monthly payment will decrease as well, but if interest rates go up, your mortgage payment will increase, too.

Interest-only mortgages are great for first time home buyers. Most of the time, new home owners, being unaccustomed to having a monthly mortgage payment, will struggle with their budget. Interest-only mortgages have lower monthly payments for the first few years, giving first time home owners the chance to get used  to making mortgage payments. Whether you are a first time home buyer or not, you should carefully weigh in on the disadvantages of this type of mortgage. The payments may be smaller in the beginning but, if you don’t plan accordingly, you can run into some serious trouble when the second repayment period comes along and your mortgage payment increases.

Top 10 Types of Mortgage Loans

top 10 loan types- 150x150A mortgage is a type of loan where the bank or another lender loans you a large amount of money, which you must repay with interest over a set period of time. There are several types of mortgage loans available, each tailored to meet the needs of a specific group of home buyers. Searching for the mortgage loan that best suits your financial situation must be treated very seriously. Here is another resource to help you decide: mortgage lender or mortgage broker?

Types of Mortgage Loans

Even if you are considering getting professional advice before choosing a mortgage, it is always wise to know what options you have before talking to a professional. Knowing what types of mortgages are available will not only make things easier to understand, but also put you in a position where you can ask the right questions, making sure that what you choose is the right option for you. Additionally, here is a list to help you find the Best Mortgage Rates.

Top 10 Mortgage Loans Available from Most Lenders

  1. Fixed Rate Mortgage. This type of mortgage is the most popular mortgage in the United States, and is suitable for individuals who plan to keep their house for more than a couple of years. Usually, the life of a fixed rate mortgage is 15 or 30 years, but it can also come in terms of 10, 20, 40, or even 50 years. The interest rate and the monthly payments remain fixed during the life of the loan, thus homeowners can manage their budget more easily knowing exactly how much they owe to the lender every month. In case rates drop, homeowners have the possibility of mortgage refinancing to get a more advantageous interest rate. Here is a list of the Best 5-Year Fixed Mortgage Rates.
  2. Adjustable Rate Mortgage. Also known as ARMs, adjustable rate mortgages are preferred by people who aren’t expecting to own a house for a long period of time. With an ARM, individuals have a predetermined adjustment interval (6 months to 5 years), for which the interest rate will be fixed.  After the adjustment period, the interest rate will usually go up, and then change periodically over the term of the loan, as specified by the lender.  Before committing to this type of mortgage, homeowners should make sure that they can afford the highest possible payment of their loan, as sometimes the interest rate can go up by 6 percent. Some of the most common ARMs are: 1-year Adjustable Rate Mortgage, Hybrid or Intermediate ARM, Flexible Payment Option ARM, and Convertible ARM.
  3. Balloon Mortgage. A balloon mortgage will have a fixed rate for a period of 5 to 7 years, after which the remaining balance is due in its entirety. Because of its large size, the final payment is also known as a balloon payment. Balloon mortgages are best for people who intend to sell their house before the balloon payment must be made.
  4. Jumbo Mortgage. When the mortgage loan is over Freddie Mac and Fannie Mae traditional loan limits, the mortgage is called a jumbo mortgage. The conforming limit for a jumbo loan is $625,000. A jumbo mortgage will require a larger down payment, and the interest rates will be higher compared to the interest rates of a conforming loan.
  5. Interest-Only Mortgage. With this type of mortgage, homeowners have the option to pay only the interest of their principal, for a period of five or ten years. After this initial period of time, the principal balance will be paid down over the remaining years of the loan. Due to the fact that interest-only loans are riskier for the lenders, the interest rate might be higher, but these loans are still attractive to homeowners because they offer financial flexibility during the interest-only period.
  6. Reverse Mortgage. Available to elderly individuals 62 years old and over, a reverse mortgage is a lifetime mortgage secured by the equity in the borrower’s home. Elderly homeowners can transform a portion of their home’s equity into cash. During the term of the loan, homeowners are not required to make any monthly payments. Reverse mortgages allow elderly persons to live in their own homes, and the owners only repay the loan if they sell the house or move to a nursing home. In the event of homeowners’ death, the loan must be paid in full by their heirs. Here is a list of the Top Reverse Mortgage Lenders.
  7. Veteran Affairs (VA) Mortgage. A VA loan is a government insured mortgage available for veterans, their eligible spouses, and service members only. Issued by a regular lender, a VA loan requires no down payment, and the borrowers don’t pay any mortgage insurance, or a penalty fee in case they pay off the loan earlier.
  8. Federal Housing Administration (FHA) Loan. Insured by the FHA, this government guaranteed loan is great for first-time home buyers, as well as individuals who can’t afford a large down payment, or have a poor credit score. A FHA mortgage offers better interest rates than conventional mortgages, and the lender might show the borrowers leniency in case of financial setback.
  9. Graduated Payment Mortgage (GPM). GPMs are available in 15 and 30-year loan terms, and are more suitable for young individuals, such as students, who wish to purchase a home, but currently do not have financial resources to pay for a loan. A GPM offers affordable monthly payments in the beginning, after which the payments will gradually grow by a percentage decided in advance. This increase stops after several years (5 to 15 years), and the borrower will pay a fixed amount every month for the rest of his loan life. The GPM is a type of negative amortization mortgage. Negative amortization (NegAm) occurs when the mortgage payment for a period of time is lower than the interest due for the same period of time, causing the balance of the loan to rise.
  10. Pledged Asset Mortgage. Also known as Asset Integrated Mortgages, and Asset Backed, pledged asset mortgages allow burrowers to use their financial commodities, such as bonds, stocks, CDs, as collateral for the mortgage loan, instead of a down payment. This kind of mortgage is intended for individuals who have enough income to easily afford the monthly payments of a loan, but who have their cash engaged in investments. A pledged asset mortgage offers attractive rates, and don’t require a mortgage insurance, but it is more accessible by wealthier people.

Choosing the right type of mortgage loan will not only save you money, but give you peace of mind for the following years. Being aware of your financial situation, budget, and understanding that paying off a loan can take a while, in which many things can happen or change, are keys to making the best choice when it comes to mortgage loans.