Different Aspects of Interest-Only Mortgage Loans

Interest only mortgage loans are the loans in which the borrowers pay only the interest on the principal balance. Majority of the interest only mortgage loans now contain an option for interest only payments. The most important aspect of interest only mortgage is that the loan balance will never increase. Issuers of the interest only mortgages do not permit the borrowers to make interest only payments forever. Usually, the time period for only interest payments is limited to initial 5 to 10 years. After the completion of this time period, the loan is amortized for the remainder of its term. The two common interest only mortgages are 30-year mortgage loan and 40-year mortgage loan. For the 30-year interest only mortgage loans, the interest only payments are made for the first 60 months. And, for the 40-year interest only mortgage loans, the interest only payments are made for the first 120 months.

In the mortgage modification program, sometimes it makes sense to opt for interest only mortgage loans. The interest only mortgage loans are very useful for the home buyers who are buying homes for the first time. The underlying reason is that many first time home buyers find it difficult to make mortgage payments. Again, for the home buyers whose salary are not fixed rather whose salary fluctuates due to varying commissions, may also think of taking out an interest only mortgage loan. The home buyers may prefer to make the interest only payments during to slim months while paying extra toward the principal when bonuses are received. Whatsoever, the rate of interest associated with interest only mortgages is relatively higher than the rate of interest in a conventional loan. When the rate of interest associated with a conventional loan is around 6%, the same rate of interest in case of an interest only mortgage loan can be around 6.5%.

According to the lenders there are two types of borrowers of interest only mortgage loans. These two types of borrowers are listed below.

• The borrowers who are upwardly mobile may prefer this type of loan. The upwardly mobile borrowers are the borrowers who stretch themselves to purchase a house. The logic for them is that the same payment on an interest only mortgage will fetch them 20% more house. These borrowers are of the opinion that their incomes will rise in a few years.
• There is another type of borrowers known as the cash-flow crowd, who may just like to pay small payments for whatever reason. They pay be individuals with irregular incomes. They may be interested to make the smaller payments in the lean months while making the big chunks when money comes in.

There are some risks too in obtaining a mortgage loan. The risk lies when you are forced to sell the house if its value has not appreciated. Say, you pay only interest each and every month on a regular basis for five years. Even after five years, you will owe the original balance as it has not been reduced.