The Danger of Interest Only & Adjustable Rate Loans

The last few years most of us have seen the upside of interest only loans and adjustable rate mortgages. Lower rate or lower payment means we can afford to buy a more expensive home. When the market is doing well and property values are ascending no one really seems to care about the dangers these type of mortgages pose to the average consumer. However when making a purchase in real estate one should weigh the pros and cons of obtaining certain types of financing. Interest only loans offer lower payments making the payment easier to make and at times can be comparable in paying rent or a little more than what it would cost to rent the property.

The upside is that the mortgage interest is tax deductible which means you pay less income taxes and if the property goes up in value you can make profit without putting more of your monthly income at risk. The downside of an interest only loan is that during the initial interest only period you have made no payment towards the principal and so you owe the same amount after the initial interest only period ends. Interest only loans usually are only interest only for the first 5 or 10 years. The problem with this is that once that initial interest only period is over your payment will change and the change is calculated by how many years are left to payback the loan based on the original loan amount.