Personal Finance

Understanding the interest only mortgage loan

The mortgage option popularly known as the interest only mortgage has been steadily gaining popularly in recent years, and in some hot housing markets, such as California, nearly half of all new mortgages incorporate the interest only option.

While interest only mortgages can be a good way for people to afford to buy a home in an overheated market, it is important to understand how to use this option, and when not to use it.

The key feature of the interest only mortgage, and its main selling point, is the low monthly mortgage payment. The mortgage payment is kept low, at least for the first few years of the loan, because the payments made represent only the interest portion of the loan. It is important for the home buyer to understand that during this initial period no money is being applied to the principal, and no equity is being built.

The idea, of course, is that home prices will continue to rise, and that the home will be worth significantly more once the interest only period has expired. The typical interest only period for a mortgage loan extends anywhere from three to five years, but the specific terms will vary from mortgage to mortgage.

The interest only mortgage strategy can work out quite well if the values of homes continue to rise steadily, but they may not work out so well if home values begin to stagnate. If, on the other hand, home prices were to fall even a few percentage points, the homeowner could find him or herself in the uncomfortable position of owing more than the home is worth. It is important, therefore, to be sure that an interest only mortgage loan is really the right choice for you.

No matter what type of mortgage loan you choose, it is important to understand what you are getting into. Mortgage loans can be very complicated, and it is important to read all the paperwork carefully. If you feel that an interest only mortgage is the right choice, be sure to get the best terms and conditions you possibly can. Many of those who take out interest only loans try to make some principal payments on their own in order to build up equity and protect themselves in case of a downturn in the housing market. This can be a winning strategy to combine the ease of an interest only mortgage with the security of building equity.

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