INTEREST ONLY LOANS:

It seems like the major rage over the past year has been the “Interest Only” mortgage.  Essentially, this program allows you to only pay just the interest on the money that you borrowed to buy your home.  The main premise of this type of mortgage is to allow you to buy a higher priced home, and because you are not paying the principal in your mortgage payment each month, and only the interest, your monthly mortgage payment is the same or lower as a home that is lower priced where you pay principal and interest as part of your monthly mortgage payment.  So, the bottom line is that you get more house for the same monthly payment.  So why isn’t everyone jumping onto this program?  Well as great as this program may seem on the surface, it’s not for everyone.

 Who Is Right For This Program:If you are an up and coming professional such as a recently graduated doctor or attorney, and you know that your income level is due to rise, then this might be the program you need.  Your payments are lower when your income is and higher when your budget can handle it.  Or, you may be just trying to get a starter home and this is the way that you can do it. Another type of client that works well with this program is the stay at home parent who plans to return to full time employment within the next few years.  This allows you to get into a larger home now for less money and when the payments go up to include principal, then your budget may be able to accommodate the escalation.

 You Plan To Do Something With The Money You Save Each Month: Some people use the money that they save each month and apply it toward other higher interest debt such as credit cards or car loans.  This make sense if you’re disciplined, but it’s bad news if you don’t stick to your plan.

 You Plan To Move Or Sell: If you purchased your home because you don’t plan on staying in the home for a long period of time and you’re in an area where home prices seem to escalate at a higher percentage than average markets, this program may help you save money each month and make a great investment.  The down side of this, of course, is that you don’t predict your market conditions properly and sell too quickly to recoup any profit.

 What Are The Problems? Interest Only programs are associated with more risk for the lender, so it stands to reason that they come with a higher interest rate than your standard programs that require you to pay principal and interest. So, you have to consider is it worth paying a higher interest rate just to save a few dollars each month from not having to pay the principal.  Make sure you get a loan comparison with an amortization schedule from your lender to help you make the right decision.

A second consideration is the effect rising interest rates will have on your budget.  Many of these programs are adjustable rate mortgages.  That’s great if the rates go down, but what happens if they go up?  Your payment does too!

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