Mortgage Loan

7 Facts About Interest Only Mortgages You Need To Know

Interest only mortgages, shortened IO, are mortgage types that require you to only pay the interest for the mortgage over a predetermined period of time.

Simply put, the mortgages do not require you to pay a principal amount for a given period of time. In essence, these mortgages are very cheap at least throughout the period of time when the interest only terms apply, but after the period has elapsed; you will now be required to start making principal plus interest payments hiking the rates therefor.

Lenders refused to offer this type of mortgage programs for years, but in recent times they are reconsidering. However, the programs come with guideline adjustments that vary from one lender to another. For instance, borrowers qualify for based on the future mortgage to income ration after payment conversion to principal and interest instead of the current mortgage to income ratio. Below are top facts you ought to know about the IO mortgages.

  1. The mortgages may not be suitable for all

The mortgages are most suitable for real estate investors. This is because they offer them the flexibility to fix up the property in readiness for a sale and then eventually make the principal payments when they are most suited to do so.

  1. They are not forever

Usually, the interest only mortgages run for a 10 year period. After this period, the mortgages convert to principal and interest payments. The predetermined duration of the mortgages can, however, vary from one lender to another making it important for you to compare before settling for a specific program lender.

  1. The IO mortgages are packaged differently

Most of the IO payment schedules are on adjustable rate mortgage plans, but they can also be offered on fixed rate mortgage plans. These mortgages have been incorporated into the mainstream and are not available for almost all types of borrowers.

  1. The mortgages do have risks

The interest only mortgages come with payment shock risks. When it is time to pay principal and interest every moth, payments have a chance to significantly increase leading to the shock. In adjustable rate mortgages, unpaid interest is tacked onto principal and the borrower could in the end own more than what was borrowed, but once the loan balance grows to contract limit, the monthly payments will definitely go up. The interest rate risk and market risks are some of the most damaging for the mortgages.

  1. There are a number of advantages when you choose the IO payments

The loans come with the advantage of low monthly payments, possibility of borrowers to purchase large home when they qualify for larger loan amounts and redirecting extra money for other investment opportunity to build net worth. The whole amount during the IO period also remains tax deductible.

  1. The disadvantages are real and cannot be ignored

Interest only mortgages also come with disadvantages like rising rates that increase ARM plan risks, spending extra money unwisely, dragged income growth and the risk of home not appreciating as quickly as borrowers expect.

  1. Credit score matters

To qualify for the mortgages you may require a high credit core and a given percent as down payment. In general all relevant loan checks will be used before you are given the mortgages and you should therefore start preparing early to get the best deals.

Interest only mortgages definitely do play a beneficial role in different settings and situations. There are so many practical uses for the borrowers to utilize these types of mortgages. They are however most beneficial to those who cannot afford fully-amortizing payments.

Interest only mortgages can be very beneficial, but there is the need to approach them with an open mind. Find out as much as you should before applying and be ready to face the possible risks as you enjoy the benefits.

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