Interest Only Mortgage Loans: A Bad Idea?

What are interest-only mortgage loans?

 Interest-only mortgage loans are loans that only require a borrower to pay interest charges for a specified period of time. However, the term can be somewhat of a misnomer in some cases. These days, more and more “interest-only” mortgage loans may actually involve capital repayment.

Here’s how it works: you take out a $100,000 mortgage loan at an annual percentage rate of 15%. Under an interest-only payment scheme, you will only need to pay $1250 a month. That doesn’t seem a lot, especially if you are living in a house worth a hundred grand. What you might not know is that your “interest-only” mortgage loan may not stay that way for very long. 

The first five years of your mortgage, you will be paying just $15,000 a year for your $100,000 house. However, by the time year six comes around, your lender might opt to ask you for capital repayment as well. If this happens, you will need to pay a portion of the principal along with your interest payments. The abrupt change in financial obligation might wreak havoc on your finances.

So before taking out an interest-only mortgage loan, it is best to scrutinize the terms of the loan carefully. Unless you have had prior experience in this area, it is not recommended that you try to do it alone. Hire a lawyer to read the mortgage contract for you, or with you. This may seem like an extraneous expense now, but it will probably end up saving you thousands of dollars in the future.

Loans

Financial Services