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Interest-only Mortgages Have Their Pitfalls
Rising home prices, particularly on the East and West coasts
have put the costs of home ownership seemingly beyond the reach
of many. And yet, home ownership is up nationwide, and the
percentage of Americans who own their homes is the highest it has
ever been. How is this possible?
There are more different types of mortgages available to home
buyers than ever before, and one that is growing in popularity is
the interest-only mortgage. With an interest-only mortgage, the
buyer pays no principal for the first few years of payments. The
period of time varies, and is typically anywhere from one to five
years. At that time, the principal is added to the mortgage
payments and the amount of the payment increases. By keeping the
payments lower for the first few years of the mortgage, the
interest-only mortgage allows buyers to obtain a more expensive
home than they otherwise might. The buyer's income will probably
increase over time, making it possible to afford the higher
payments that will come when the principal is finally added to
the payments.
The downside to an interest-only mortgage is that no equity
accrues in the home if the buyer isn't paying any principal. For
many Americans, the equity in their home is their single largest
financial asset, so taking out a mortgage that doesn't build
equity would seem to be a bad idea. Equity has long been used as
a last resort source of funding for emergencies. And yet, with
the price of homes rising so quickly these days, many buyers
don't seem to care. Equity can be built two ways - either through
paying down the principal or by an increase in the market value
of the home. If the value of your home increases, so does your
equity, even if you are only paying interest on the mortgage.
This is great, so long as home prices continue to increase. But
what if prices fall?
There are potential problems with interest-only financing.
Interest-only mortgages have variable interest rates. If interest
rates rise, mortgage payments will increase. If payments increase
beyond the level of affordability, homeowners could be forced to
sell their homes. This could lead to a glut in the housing
market, causing prices to fall. Owners wishing to sell could find
that they owe more money than their home is worth and that they
have no equity.
The interest-only mortgage is a useful tool to help people buy
a home they otherwise might not be able to afford. Prospective
home buyers should consider whether taking out such a mortgage is
a good idea, or whether they might be better off buying a less
expensive home.
©Copyright 2005 by Retro Marketing. Charles Essmeier is
the owner of Retro Marketing, a firm devoted to informational
Websites, including End-Your-Debt.com, a Website devoted to
debt
consolidation information and HomeEquityHelp.net, a site
devoted to information on home equity loans.
 MORE RESOURCES updated Thu. February / 09 / 2012
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