Make Sure You Understand Those Interest Only Home Loans

Many borrowers seek interest only home loans without truly understanding what they entail. Some assume the initial low payment forever remains at the stated amount. Others don't understand the ramifications of the lack of principal repayment. Before you select an interest only mortgage make sure you fully understand the terms.

For many years most all mortgages were of the same variety. They were thirty year fixed rate mortgages with even amortization over the course of the loan. Then came interest only mortgages. These mortgages allow for a lower initial payment. The flip side is a mortgage payment which can greatly increase to more than you can afford. This is obviously not a desirable outcome.

Even more tricky are mortgages with interest only payments entailing a very low starting "teaser rate". This is an extremely low interest rate given to the borrower for a short period of time during the first stage of the mortgage. Then, the interest rate goes up severely. Some teaser rate loans have increased from 1% to over 15%. These are generally traps ending in a foreclosure.

Unfortunately, many unknowingly took out these teaser rate loans. The fact that they adjust significantly higher was buried in the fine print. Failure to read and understand all terms in a mortgage is a recipe for disaster. A home is most often the largest investment of your life. It is worth the extra time to research and fully understand the terms of your mortgage.

With all interest only mortgages you do not pay down any principal until the interest only period ends. This can prove to be harmful. Having equity in your home can serve as a nice safety cushion. Additionally, should interest rates decrease into the future you might need that equity in order to successfully refinance into a lower rate.