What Is An Interest-Only Mortgage?

Interest-only mortgages differ from traditional mortgages in that they do not require fully-amortized payments for the entirety of their term. Interest-only mortgage loans have a certain period of time when monthly payments are based solely on the interest accrued on the loan.

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When applying for a bad credit mortgage loan, make sure you are current on your existing credit lines. You will want your current credit to be as good as possible.

Also, make sure to include all the income you have. If you have any equity in any stocks or other financial accounts, make sure to mention that to the broker as well.

The more money you can put down on the loan, the more likely it is that you can get approved. FHA loans usually only require 3-5% down. They are also usually open to working with people with credit problems.

The period of time in which interest-only payments are allowed is established by the lender. During this time, the borrower does not make payments on the principal of the loan; therefore, they gain no equity in the home. Making interest-only payments is similar to renting a home.

However, after the period of interest-only payments, the loan converts to a traditional mortgage. The borrower is then responsible for fully-amortized payments for the remainder of the loan’s term. This means that you would have to pay off your principal in a shorter amount of time.

Interest-only mortgage loans can be beneficial to college students and young professionals who expect their income to rise before the end of the interest-only term. This would allow them to live in their own home for a period of time before they can afford to start earning equity in it.

Borrowers who are considering entering into an interest-only mortgage loan should keep in mind that their monthly payments will be higher after the interest-only term than it would be on a traditional mortgage. They will not earn equity in their home during the interest-only payment period. Additionally, should the value of their home decrease, they could end up owing more than their home is worth.

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The average rate of interest on mortgage loans continues to fall and has been under 5 percent for almost all of this past year, with this recent round of rate cuts seen as the lowest for borrowers in years. The reason, many borrowers today have bad or at least less than perfect credit scores. Still a borrower with less then perfect credit an jump through a few hoops and get a fairly decen rate on a loan.