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Interest Only Mortgages: the Right New Home Loan for You?
by Gil Mackey
CMR Columnist
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If you've seen advertisements about interest only mortgages, you might feel enticed by the idea of low mortgage payments and saving some money--or buying a home that you couldn't otherwise afford. Getting into an interest only mortgage, however, is not a decision to be made lightly. There are pros and cons, and both must be weighed before you choose this for your new home loan.
How Does it Work?
Most interest only mortgages offer a very low rate for an introductory period. This rate is often lower than what you could otherwise get on a new home loan, and your payments are only applied to the interest on your loan. During the intro period, the interest builds up faster on your loan than with a fixed-rate mortgage because you are not making any payments on the principal. This is referred to as negative amortization and you may find that you quickly owe more on your mortgage than the original amount you borrowed.
After this intro period, you are required to pay both interest and principal payments, and usually the mortgage switches to an adjustable-rate product. The interest can fluctuate based on the index used, and the adjustment period varies with the loan.
Is an Interest Only Mortgage the Right Choice?
The average homebuyer probably won't benefit from an interest only mortgage for their new home loan. Those with unpredictable incomes, large bonuses paid out annually, or those who need to maximize monthly cash flow can get the most benefit from an interest only mortgage. Because eventually you will be "upside down" on the mortgage, it is critical that you know what you need to do to get caught up. Talk about this option in detail with your lender before you make a decision to obtain an interest only mortgage.
About the Author
Gil Mackey has been a writer and artist for the past twenty years. In addition to freelance writing for QuinStreet he writes for his local paper, and lives with his two children in Nevada.
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