An interest-only mortgage lets you pay only the interest on your loan, which can be helpful for cash-flow management. They are risky, but they are harder to get. Read on to learn more about this type of mortgage. You may even qualify for one if you’re careful with your money and save enough to make the long-term monthly payment. Listed below are some things to consider before getting one. But don’t let that deter you from applying.
Interest-only mortgages allow you to pay only interest.
An interest-only mortgage is a loan in which you make payments that reduce the total balance rather than paying down the principal. This type of loan does not allow you to accrue any equity because your costs do not decrease the principal until you have paid off the initial period. Interest-only mortgages are available in both fixed-rate and adjustable-rate varieties. The flagship interest-only loan product is a variation of a 30-year fixed-rate mortgage.
While interest-only mortgages are a popular choice for many, they are not a perfect solution. For instance, lenders that offer interest-only mortgages California are often held responsible for the financial crisis in 2008 because borrowers could not afford to pay off the loan principal. Consequently, many lenders who offer interest-only mortgages have them in their portfolios and sell them to investors with a higher risk appetite. Another benefit of interest-only mortgages is that there are no strict minimum requirements for the loan. Instead, the lender will determine the amount of down payment, debt-to-income ratio, and credit score.
Interest-only mortgages are a cash-flow management tool.
While interest-only mortgages aren’t available to all borrowers, they are ideal for some individuals. For example, some people benefit from an interest-only mortgage because they have a low monthly payment and are planning to relocate or downsize shortly. Another option is for borrowers whose income fluctuates, such as seasonal business owners who would like to make interest-only payments during the off-season.
An interest-only mortgage is available through a credit union or branch of a preferred bank. This type of loan is not available to consumers with distressing credit scores. Having a good credit score is crucial. Once approved, the lower monthly payment will allow you to free up cash for other needs. The interest-only mortgage is a great way to manage cash flow. However, the downside is that lenders demand a much larger down payment on an interest-only mortgage than they would require for a conventional mortgage. For instance, some lenders require a 25% or more down payment on an interest-only mortgage. The standard down payment for a conventional mortgage is 5%. Further, borrowers may be required to pay private mortgage insurance if they don’t put down 20% or more.
Interest-only mortgages are harder to qualify for.
A few things to remember before signing up for an interest-only mortgage: the longer the loan, the more difficult it will be to qualify for. Interest-only mortgages last a set period and require only interest payments, not principal. Even if you make extra payments before the interest-free period ends, you’ll still owe the same amount as when you started. This can be a significant disadvantage for some people.
While interest-only mortgages may be easier to qualify for than fixed-rate loans, lenders need a high credit score and significant assets to approve you. If you don’t have these requirements, you can qualify for an interest-only mortgage. However, the monthly payment is high enough to prevent you from making late payments. Nevertheless, an interest-only mortgage is still a good option if you’re a careful saver and are confident that you can repay the loan in the long term.
Interest-only mortgages are risky.
The housing market crash in 2008 was primarily blamed on interest-only mortgages, which encouraged borrowers to buy homes beyond their means. Lenders were fine with these mortgages in the early 2000s housing bubble. Still, as interest-only periods ended, borrowers found themselves unable to keep up with their monthly payments. As a result, some homeowners defaulted on their mortgages, and banks went bust.
Although interest-only mortgages don’t require extra payments to lower the principal, the borrowers have no option to increase the costs. As a result, they may be unable to make the additional payments during the loan’s initial term. This feature is helpful for people with variable income but can also create risky situations if they cannot jump to a higher payment when the time comes to repay the principal. These new federal consumer protection guidelines may make interest-only mortgages riskier.
Interest-only mortgages are a good option for first-time homebuyers.
Interest-only mortgages can be an excellent choice for first-time homebuyers. They can allow first-time homebuyers to buy a higher-priced house because monthly payments will be significantly lower. However, buyers should be aware of the disadvantages of interest-only mortgages, such as balloon payments at the end of the loan.
Home equity lines of credit are another great option. Home equity lines of credit work like a credit card, but they use the equity in your home as collateral. For example, a $100,000 HELOC can have a repayment period of 30 years, and you can use it to purchase any amount up to that amount. After ten years, you freeze the line of credit and pay off the remaining 20 years.
Interest-only mortgages are challenging to refinance.
An interest-only mortgage is a type of loan that does not build equity in your home until you begin making principal payments on the loan. This is problematic for some reasons, including declining home values may cancel out any equity you have built in the home. Moreover, the low monthly payment on an interest-only mortgage is merely a temporary relief from the eventuality of repaying the entire loan. As soon as the interest-only period ends, your costs will increase.
Interest-only mortgages are tough to refinance, especially after the housing market crashes. While you can get an interest-only mortgage with a lower interest rate, finding a lender who will approve your application will take a lot of work. One important consideration when shopping for a mortgage is its payment structure. Interest-only mortgages have a fixed rate for a certain period, but they switch to an adjustable-rate mortgage with a lower interest rate.