Must-Know Facts about Interest Only Mortgages

Before you decide on interest rate only mortgages, there are some things you need to know. Here is what you should be aware of before you sign.

The Interest-Only Period Won't Last Forever

Before getting interest rate only mortgages, you have to realize that considerably higher mortgage payments will kick in eventually. Usually with interest rate only mortgages, the term of lower payments lasts for five to ten years. After that period expires, you will typically have 20 to 25 years to repay the loan's principal and the remaining interest. This means you will be paying on an accelerated schedule once the interest-only period expires. Typically, lenders advice that you refinance interest rate only mortgages with a fixed-rate mortgage before the interest-only period expires.

Interest Only=No Equity

When you are making interest only payments on your mortgage, you need to understand that you are not building any equity in your home during this time. In other words, you do not own any portion of your home during this period. This means that interest rate only mortgages prohibit you from using your home as collateral to get a low-interest loan or line of credit. You can build equity with interest rate only mortgages during the interest-only period if you make extra payments, which will go toward the principal.

Understand the Housing Market Risk

One of the biggest risks of interest rate only mortgages is the uncertainty of the housing market. If the housing market were to slow down during your repayment period, you might end up owing more on your home than it is worth because you have not paid down the principal. This means that you would not even be able to recoup the cost of your house with the sales price.