Watch Out for Interest-Only Home Loans

Now that the economy has picked up some, the housing market is recovering a little, and memories of the financial crisis are fading, some lenders are re-introducing a few “creative” financing methods. It’s possible to get an interest-only mortgage again, or get a loan with a low, low rate at the beginning.

An interest-only loan is tempting because the borrower only pays the interest each month. This state of affairs can last from five to 10 years. When you only pay the interest, it feels like you can “afford” more house. You aren’t paying the principal, so you are only paying one part of the loan, and it seems like a good idea. However, you could actually end up in big trouble.

While some lenders are re-thinking interest-only home equity lines of credit, others are comfortable offering these types of options to those looking to buy a home. Before you go for an interest-only loan, though, it’s important to understand what you are getting into — and to reconsider.


Building Equity Slowly

One of the biggest problems with an interest-only loan is how it hampers your ability to build equity in your home. An amortization calculator can help you see how fast your mortgage balance is decreasing. With an interest only loan, you’re not paying down the principal, so you really aren’t making much headway.

If you have to sell your house, you might find that there isn’t enough equity in your home to leave anything left over for you after the sale goes through. It also makes it practically impossible to refinance your home, since you don’t have the equity needed to put lenders at ease.

A home bought with an interest-only mortgage seems affordable at first, but it quickly becomes apparent that it’s not affordable in the long run.

Paying the Cost Later

The biggest problem with getting an interest-only mortgage is that you end up paying a lot more later. Once you start paying on the principal (something that happens after the initial period is over), payments can skyrocket. It’s vital that you understand this reality of interest-only home loans.

Many homebuyers who took the plunge with interest-only mortgages prior to the housing crash and financial crisis did so expecting to make more money in a few years. They thought of a higher income, able to handle the payments.

Other homebuyers assumed they would be able to refinance. Even though they weren’t paying down principal, the assumption was that housing costs would keep climbing, so equity would be built, even without mortgage principal payments. They could refinance before the higher payments hit, and things would work out.

We all know how that went.

Unfortunately, the fact that these types of loans are starting to become available again means that there could be more problems down the road. And, of course, analysts are on the watch for what is going to happen in the next little while, since there are still interest-only loans from the past that still haven’t worked their way through the system.


How To Stop Feeling Pessimistic About Retirement

When many Americans think about retirement, they are pessimistic — and for good reason. According to a recent COUNTRY Financial Security Index survey, 25 percent of Americans say that they are not saving for retirement at all. If you aren’t saving toward your retirement, it’s hard to be optimistic about it. Additionally, there is a […]


How To Handle A Canceled Flight

I‘m getting ready for a few months that include quite a bit of travel. While I don’t usually run into problems when I fly, my husband has had a couple of experiences with canceled flights. Twice he’s experienced flight cancellations in the midwest due to tornadoes. And, of course, if you travel during the winter […]

Can You Trust Your Tax Preparer?

My tax preparer is a life saver. Ever since I formed my LLC and began investing, my taxes have been a bit on the complex side. As a result, an accountant prepares my tax returns each year (one for the business, and one for my husband and me, plus our state tax return). This makes […]

3 Spending Traps To Avoid This Holiday Season

This time of year, it’s all about the shopping. Shopping for food, for gifts, and for decorations. However, it’s easy to fall into spending traps when you’re already predisposed toward spending money. Before you head out, be aware of the following spending traps, and do your best to avoid them. 1. Buying Something Because It’s […]

What To Do If You’re Underemployed

It’s not fun to be underemployed, but if you want to chance the circumstances, you need to keep working hard, and looking for networking opportunities that can lead to a new job.

Budget Out Of Control? How to Take Charge

There are times when it seems as though your money is in charge of you. At times, whether it’s because you are anxious and stressed, or just because you’re busy and feel you don’t have time to manage your money, it’s possible for your budget to get away from you. You find yourself pulling out […]

3 Common Types Of IRAs To Consider

Retirement is something that most people know they need to focus on at some point in their lives, yet many get so overwhelmed by it that they don’t take the time to do so. Learning the ins and outs of retirement can be a long, frustrating experience, but just knowing that you’re saving towards the […]