There are different kinds of interest-only mortgage loans – from time to time lenders add or pull various interest-only mortgage programs. Is an interest-only loan a good or a bad loan program? Well, it depends. There are both good things and bad things about interest-only loans and here are just a few of both:
Arizona Interest Only Mortgage Loans: The Good
Interest-only loans have a lower monthly mortgage payment than a regular loan because you are only paying back the interest and not the principal of the loan for a period of time. As an example, if you borrowed $200,000 with a regular amortizing loan, your monthly payment at 6.5% would be $1265. With an interest only loan, it would be $1083 — or it would save you about $181 per month.
With interest-only loans, you may be able to qualify to buy a larger house because you can spend more. Depending on the interest only loan program, you may be able to qualify on an interest only monthly payment – which means you may be able to borrow more money than you could with a regular mortgage.
You can also still make principal payments if you want with an interest only loan. Using the example above, you could pay the $1265 if you wanted to or you could just pay the $1083 if money was a little bit tight that month.
Another thing interest only mortgage loans are possibly good for are investment properties. With an investment property, sometimes the difference between a $1265 and a $1083 payment can mean the difference of cash-flowing the property or taking a monthly loss. With the right financing in place, it may be possible to cash flow a property rather than have negative cash flow every month.
Arizona Interest Only Mortgage Loans: The Bad
Interest only loans are only “interest only” for a period of time — usually up to 10 years. This means that while you may have a lower payment for 10 years, the remaining 20 years of the loan will be a higher-than-normal payment. If you play on keeping a home for more than 10 years, be aware that starting in year 11, your mortgage payment will jump significantly.
Be sure that you are not buying too much house – just because you can qualify for a house using an interest only payment, doesn’t mean that you can afford it. Many lenders now require people to qualify on a “regular amortization” payment even if they are getting an interest only loan for this reason.
When home values decline, interest only loans can be painful. If you purchase a home for $200,000 and make payments on it for 5 years – your balance on the loan is still $200,000. If property values decrease in that 5 year period, you will be significantly underwater. You have less chance of becoming “upside down” in your home if you do a conventional, principal-and-interest mortgage loan in stagnant or declining markets.
Arizona Interest Only Mortgage Loans: Summary
Are interest only mortgage loans good or bad? It depends. They can be good if used properly and the parties understand what is going on. They can be bad if someone is using an interest only loan to put their family in a too-stretched financial position by buying too much house.