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 several. And yet, home ownership countrywide is up, and the percentage of People in america who own their homes is the best it has ever been.
How is this possible?
You can find more different kinds of mortgages available to home buyers than ever before, and one which keeps growing in popularity is the interest-only mortgage. With an interest-only home loan, no primary is paid by the buyer for the first few years of obligations. The time period varies, and is typically anywhere from someone to five years.
At that time, the main is added to the mortgage payments and the amount of the payment raises. By keeping the payments lower for the first few years of the home loan, the interest-only mortgage allows buyers to secure a more expensive home than they in any other case might.
The buyer’s income will increase over time, making it possible to afford the higher obligations 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 collateral would seem to be always a bad idea.
Collateral is definitely used as a final resort source of financing for emergencies.
Yet, with the price of homes rising so quickly these days, many customers don’t appear to care. Collateral can be built two ways, either through paying off the main or by a rise in the market value of the home. If the worthiness of your home increases, so does your equity, even if you are only paying interest on the home loan. That is great, as long as home prices continue steadily to increase. But what if prices fall?
There are potential problems with interest-only financing. Interest-only home loans have variable interest rates. If rates of interest rise, mortgage payments will increase. If payments increase beyond the known level of affordability, homeowners could be required to sell their homes.
This could business lead to a glut in the housing marketplace, leading to prices to fall. Owners wishing to sell could find that they owe more money than their home is worth and they have no collateral.
The interest-only mortgage is a good tool to help people buy a home they otherwise may not be able to afford. Prospective home buyers should think about whether taking right out such a mortgage may be beneficial, or whether they may be better off buying a less expensive home.