Getting an Interest Only Mortgage

Getting an interest only mortgage isn't much different than getting a traditional mortgage.  Most mortgage lenders offer this as an option although they aren't nearly as popular as they once were.  There isn't much difference in qualifying for this as compared to a regular mortgage.  Really the biggest issue is - Do you know what you are getting yourself into? 

With a traditional mortgage, you pay principle and interest for a set term - usually 30 years.  The first 10 years or so, you'll pay mostly interest with a small principle amount.  Each month, you pay a little more principle and a little less interest.  If you have a fixed rate mortgage, your total payment of principle and interest stays the same each month. 

With and interest-only mortgage, you don't pay any principle for that interest-only period.  I can hear you now saying "well, duh!" But at some point, you will need to start paying that principle. Paying it over a much shorter time period is going to make for some VERY high monthly payments.  Yes, the idea is that your home increases in value and you can refinance at a later date.  But ask the millions of people in 2007 and 2008 how well that idea worked!  Their payments jumped by $500-$1,000 a month.  They weren't able to refinance because they owed more than the house was worth and they couldn't afford the new payments either. 

I'm not saying that it's never a good idea to use an interest-only mortgage, but you should be aware of what you are signing up for.  Make sure that you can make that payment when it jumps or that you have cash to pay down the mortgage if you need to refinance and you owe more than the house is worth. 

That said, getting an interest-only mortgage isn't all that hard if you can qualify for a mortgage.  Mortgage rates for interest-only as compared to fixed or traditional adjustable-rate mortgages are usually pretty close.  You will usually have some options as to the length of the interest-only period.  Although there are true interest-only mortgages where you don't pay anything until you make a single balloon payment at the end of the full principle amount, there are a lot of 5-10 year interest-only payment periods.  At the end of the interest-only period, your payment amount resets and you pay the whole principle amount over the remaining 20-25 years.  The longer the interest-only period, the higher the monthly payment will be when you move to the next period.  Like traditional mortgages, you often have the option to pay points to lower your interest rate. 

You will need to apply and qualify for an interest-only mortgage.  You will have to provide all the same documentation as you would for a regular loan.  You should be able to find out what the new payment will be when the interest-only portion is over. 

One thing to keep in mind is that you can always make extra payments during the interest-only portion.  Any extra you pay will be paying the principle down directly.  Not only will you be used to a higher monthly payment, but you will be building equity in your house as well.


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