Interest-Only Loans Overview
What Is An Interest-Only Mortgage?
A traditional mortgage requires that buyers pay a portion of the principal and interest each month. An interest-only mortgage loan allows borrowers the option to only pay the interest for a set period of time, usually 5 to 7 years. Then they must start paying the principal.
The borrower may pay the principal at any time during the interest-only payment period. After the interest-only period ends, the borrower can choose to refinance or start paying principal and interest every month as if it were a traditional mortgage.
Here are the facts about interest-only loans.
Pros & Cons
An interest-only loan has two main benefits: the low monthly initial payments (which are just the interest) and the flexibility of initial payments (because the principal can be paid down along with interest but not the principal).
The problem is that you won't build up equity in your home during this initial portion of the loan. This can often last for seven years. You should also be prepared for the possibility that your monthly payments will rise in the future.
Who These Loans Make Sense For, And Who They Don't
These loans can be a good option for someone who doesn't make much money right now but will soon. Someone whose income is mainly from commissions or bonuses. Or someone who intends to invest the difference between the amount he pays monthly with a traditional mortgage loan and the interest-only loan.
However, these loans are not for people who have a stable income and don't expect to earn much more in the future or who want to build equity in their home to be able to later take out large home equity loans to improve the property.
Available
Interest-only loans were popular before the collapse of the housing market. Banks offered them to anyone who qualified. Unfortunately, it's difficult to find one these days and get approved for one.
These loans were not only reduced by banks after the housing crisis, but new regulations will likely prevent them from being offered in the future. The Consumer Financial Protection Bureau issued new rules in January 2013 to protect consumers against "risky lending practices," such as interest-only loans.
