First Person: Are Interest Only Loans Brilliant or Trouble?

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Interest only mortgages allow a borrower to get a lot of house for a unusually small monthly payment, at least initially. Over time, the payment grows exponentially, becoming thousands of dollars more than what the buyer may have bargained for. If this sounds like a bad idea that is because–for most consumers–it is. Not only are interest only mortgages a lousy idea for the everyday buyer, but also they are one of the driving forces behind the housing fallout in 2007. Despite that, no mortgage is all rubbish; there are certain, specific situations in which an interest only mortgage makes a lot of sense.

Biting off more than you can chew?
If you are like most people, your accommodation tastes head slightly above your budget. However, if you are the ordinary, 9 to 5 salaried person, an interest only mortgage could very well be a financial death sentence. The premise of this mortgage product is for the consumer to make interest only payments during the first few years of the note. This makes the first few years of a mortgage a few thousand dollars, but after 10 years, the payment eclipses over five thousand dollars a month. If you don’t have that kind of money laying around, or unless you are willing to refinance to a much higher monthly payment, you could have very well have bought yourself out of a house.

Who is an interest only mortgage good for?
The best candidates for an interest only mortgage would be executives who receive a fixed base salary, but make the majority of their money on commissions or intermittent bonuses. For example, business owners, or self-employed persons with varying income benefits from this type of loan.

Another good candidate for an interest only mortgage would be someone like a doctor or attorney when starting a practice. The moderate mortgage payments that increase over time, along with salary and bonuses each year, can make sound financial sense.

Probably the Best Applicant
Investors are also suitable candidates for interest only properties. Typically, however, an interest only mortgage is most suitable for investors planning to flip a house for a profit, making mortgage principal payments a moot point. The trick here is for the investor to purchase the property at a rock bottom price, spend as little as possible on rehabilitating or remodeling the property and then flipping the house for a quick sale within a few months of his initial investment. In this regard, the investor quickly recoups money spent on monthly mortgage assessments on an interest only mortgage, and profits on the sale of the remodel at the same time.

No matter what the circumstance, interest only loans are not for the faint of heart. Anyone interested in this type of financing should discuss negative repercussions at length with a CPA or financial advisor.

More from this Contributor:
Pre-Qualified vs. Pre-Approved
Questions a Mortgage Lender Will Ask You
What it Takes to Qualify for a Mortgage