How Do Interest Only Mortgages Work?
Interest Only mortgages are offered on fixed rate or adjustable rate mortgages as wells as on option ARMs. During the interest only period (which is usually 5-7 years) the borrower pays only interest each month, not principal. This results in lower monthly payments than with a fully amortizing loan. At the end of the interest only period, the loan becomes fully amortized, thus resulting in greatly increased monthly payments. The new payment will be larger than it would have been if it had been fully amortizing from the beginning. The longer the interest only period, the larger the new payment will be when the interest only period ends.
There Are Pros & Cons To Interest Only Mortgages
Interest Only mortgages can have some advantages; they may allow borrowers to qualify for larger loans due to their lower monthly payments, and they may provide flexibility if borrowers experience a temporary decrease in income due to illness or job loss during that time frame. However, there are also some major drawbacks associated with these types of loans; namely, borrowers are not building equity during that time frame and therefore missing out on potential tax benefits, and when their payments increase at the end of this period many borrowers may find themselves unable to make those increased payments leading to financial hardship or foreclosure.
If you are considering an Interest Only mortgage for your next home purchase, it is important to weigh both sides before making a decision. While these loans may seem appealing at first due to their lower monthly payments during the initial years, they come with a lot of risk if you do not plan ahead for when those payments become much higher at the end of that period. It is also important to remember that while you may qualify for a larger loan amount with an Interest Only mortgage compared with traditional mortgages, it might be better financially speaking to choose a loan that fits more comfortably within your budget right away rather than taking on additional debt without having any equity built up yet. Ultimately you should think carefully about all factors before deciding which loan is right for you.
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FHA home loans are mortgages which are insured by the Federal Housing Administration (FHA), allowing borrowers to get low mortgage rates with a minimal down payment.
The most common type of loan option, the traditional fixed-rate mortgage includes monthly principal and interest payments which never change during the loan’s lifetime.
Low Down Payment
Loans where the borrower is able to wrap many of the costs and closing costs into the loan, lowering the amount needed to close.