Interest Only Mortgage Loans: Not for Everyone

2007-03-22 16:46:53

( Financial )



Interest only mortgage loans were offered with a specific type of clientele in mind. There are certain conditions and elements to interest only mortgage loans that make this type of loan not suitable for everyone. Before you decide to take an interest only loan, you need to check if this type of loan is for you or not.

First of all, interest only mortgage loans are for people who need to have extra money every month, not for paying off other debts or to get other debts, but to make investments and engage in other money generating ventures. First of all, a mortgage interest only payment though it is at first, will only remain so for a few years. After the initial period, say five years of interest only loan payments every month, this loan will become a fully amortizing one.

This means that you may not be able to make payments after the initial period if you used the money you had saved from interest only loan payments to acquire other loans or to make payments on other debts because you had nothing to fall back on and draw money from when the interest rates became an adjusted rate and your loan payments included payments toward the principal. Indeed, interest only mortgage loans can break you financially because of this.

If all you have to do with the money you don’t pay towards the principal is use it to take out another loan, it is better to avoid the interest only loan program. This will get you in deeper in debt when the time comes to make fully amortizing monthly payments on it.

On the other hand, if you plan to use the money you save every month from your interest only mortgage loans to invest in high yield savings accounts or in money markets where you get even higher interest, you will not have a problem because your investments will yield enough money to cover the rise in your monthly payments, maybe even with some money to spare.


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