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All about the interest-only mortgage By Justin Hunter

High home prices that are falling but just not enough for the majority of home buyers to afford that 20 percent down payment, is prompting many people to look into alternative mortgage options.
If you do not make a 20 percent down payment or higher on a property you will have to pay the private mortgage insurance (PMI) anyway so you may as well explore the variety of “nontraditional” mortgage options.
Quickenloans.com provides the informative article, “Interest-Only Mortgages” that offers all the basic necessary information on one of the most popular and inquired mortgage option on the market.
So, you pay just the interest on the total loan amount?
This mortgage has obviously been generating a lot of curiosity from prospective home buyers that just do not have the necessary finances to feel comfortable with the monthly traditional mortgage obligations.
“An interest-only loan is one that gives you the option of paying just the interest or the interest and as much principal as you want in any given month during an initial period of time after your closing.”
This mortgage allows the borrower to not pay any amount towards the principal for a pre-determined amount of time if desired. Although the interest rate on this mortgage will most likely be higher than a traditional mortgage, the interest-only payments will be substantially lower which will free up some finances and is ideal for borrowers with investment options.
“On a traditional 30-year fixed-rate mortgage, roughly 70% of the payment goes toward interest during the first six or seven years of the loan.”
So, instead of paying the extra 30 percent of the loan’s premium monthly for a fixed amount of years, this option allows the borrower to invest this extra money in a fund or bond that should earn more than the interest rate you are paying on.
Interest-only borrowers also use their monthly savings to pay off outstand credit cards and other damaging debts.
This option is viable for borrowers who expect to be in their homes for less than ten years. Since the average homeowner stays in their residence for five to seven years and will sell before the payments increase to include the premium amounts, an interest-only mortgage would allow the borrower to use the extra money as they desire; save for college tuition, make home improvements or buy a much-needed new car.
However, an interest-only mortgage borrower does have to be diligent and careful with his or her monthly financial management because once the interest-only period is up, the new monthly payment will be about double what the borrower was paying for several years prior.
This is fine if the borrower has used the extra money to invest wisely or has received a subsequent raise, but if the borrower has grown accustomed to the interest-only payment and formed a lifestyle budgeted to it, the new adjusted monthly payments could cause irrevocable financial damage.
The interest-only mortgage can be a very helpful tool for a variety of reasons but can become dangerous if not used wisely.

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