Interest Only Home Mortgage Loans

Increasingly, people are applying for interest only home mortgage loans annually. According to the Council of Mortgage Lenders, there has been an increase in the demand for these loans equaling to approximately twenty percent in the last couple of years. Nevertheless, rushing to answer the call for this low monthly payment mortgage loan, you first need to understand them and know how they work. Interestingly, the majority of people who apply for these loans are first time home buyers due to the fact that they normally can’t afford the usual monthly payments of home mortgage loans.

Actually, applying for this type of a loan can sometimes be very daunting and even more when determining how much you will be required to repay, either monthly or the full amount payable in the long run. The majority of people find this quite difficult, especially so the first time home buyers. Nevertheless, banks and other financial consultants usually offer guidance, though for products you only applied for and not necessarily about the risks involved or assistance with tools for prediction of inflation or rate of interest changes.

Who can apply for these loans?
In contrast to the usual mortgage loans whose payments comprises of both the capital and the payable interests, the interest only home mortgage loans take only interests during the preliminary part of the loan’s repayment program. Initially, the monthly loan payments are kept low enough so as to be affordable to everybody requesting or applying for them. Nevertheless, after some time, the borrower is required to start repaying the capital part of the loan. Typically, interest only home mortgage loans are only beneficial to those borrowers who can’t afford paying the high monthly mortgage payments straight away but can be able to do so at some point in the future. If not, they will have money required to pay off the whole loan’s principal when it falls due.

In a number of countries, these loans are mostly prohibited, due to the fact that at the end of the loan’s repayment period, the borrower will have no option but fund the original cost of the property from external sources which may put undue pressure on them. If not, they risk losing the property they are paying for irrespective of having paid the payable interests. Despite of this prohibition, borrowers can still be able to obtain them under special circumstances as specified by their country’s financial rules and regulations. For instance, for investment mortgages, it doesn’t matter as the main goal is to buy an investment property, rent it out for some years, then dispose it and get a profit while at it and not hold on to it indefinitely.

The rate of interest valuation issues
Basically, an increase in the rate of interest can significantly skyrocket the usual monthly loan’s payments reducing the borrower’s repayment ability, thus making them unaffordable. This is due to the fact that the loan payments are mostly composed of interests only, thus any variation in their rates typically affects the monthly repayment amounts significantly and most borrowers find this quite distressing and this may lead to defaults. This being so, the borrower should strive to only apply for a fixed rate interest loan whose rates are predictable. If not sure, then they should seek for more information on the mortgage loan product they are applying for from the lender, if not from any competent financial consultant (normally they will avail the information free of charge).

The risk of defaulting and repossession
The main problem with interest only payments and variable monthly payments for limited duration of time is that although the borrower could afford to pay the lower monthly payments easily, whenever there is an increase in the normal monthly repayments, they need to be able to afford the difference, otherwise they may end up losing the property they have just acquired.

In the past, lenders required that you provide some proof of sufficient income or a valuable asset before they could honor your loan’s request. Today, all this has changed in that by charging a higher interest rate, lenders are more than willing to risk it all and loan money even to those in the lower income brackets. However, this doesn’t mandate people to take out loans that they could hardly afford. In case of a failure to honor the loan’s repayment agreements, the lender is allowed by the law to repossess their property to recover their capital investment.