Refinancing or buying a home with interest only mortgage is a pretty new thing. While the appeal of an interest only mortgage is typically a greater monthly cash flow, this increased cash flow can come with a hefty price tag. In turn, the homeowner won’t be able to get a fixed rate mortgage nor build equity. Read on to know more about this interest only mortgage.
Increased Monthly Cash Flow
Increased monthly cash flow is the only main benefit homeowners can get out of interest only mortgages. There is more money available per month since the homeowner pays for interest only at the start. Greater monthly cash flow enables a homeowner to get a bigger house or have a bigger budget. These options aren’t entirely safe, though.
While interest only loans may not be ideal, they can be beneficial in the situation where the homeowner is having a great deal fulfilling his monthly obligations. This means that the homeowner would have to lose money in the end for him to pay his monthly dues on time.
Adjustable Rate Mortgage (ARM) and Its Risks
Adjustable rate mortgage or ARM usually comes along with interest only loans, which involve an unfixed interest rate. This can cost the homeowner much if the interest rate was to rise. There is a limit, but this limit is in percentage, so it could still be a lot of money.
An ARM re-finance option with an interest only component may be worthwhile in some situations. For instance, a homeowner can benefit from the loan it involves an interest only portion with a fixed rate and an ARM for the principal and interest portion and if the homeowner stays in the home for as long as the interest only period. The length of the period will be different according to the lender and the conditions. If the homeowner will sell the house before the end of the interest only period and before the ARM period starts, he will surely enjoy the low monthly dues and the fixed interest rates.
Absence of Equity
Interest only mortgages don’t permit homeowners to build equity in the home during the interest only period. This is not in favour for those homeowners who want to gain money from selling their homes. This could lead the homeowners to want to reconsider their decision for the loan.
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