Interest Only Mortgage Should I Get One ?

Interest Only Mortgages (IOMs) are a risky financial product with notable disadvantages. They can be misleading because the initial payments are very low for the first 1, 2, 5, 7, or even 10 years. However, at the end of the loan term, a balloon payment for the entire principal balance is due. IOMs might be beneficial in rapidly appreciating housing markets, especially if the plan is to stay in the house for only a few years.

These mortgages are available in both fixed rate and adjustable rate varieties, with most being adjustable rate mortgages (ARMs). Since only the interest payment is due initially, IOMs usually have lower monthly payments compared to those requiring both principal and interest payments.

For example, if you take an IOM loan for 5 years, you only pay the interest during that period. The interest rate is adjustable, influenced by the current market rate. After the interest-only period, the payment adjusts to include both the interest and principal, significantly increasing monthly payments.

IOMs offer interest-only payment options during the initial 1, 3, 5, 7, or 10 years of the mortgage. These loans don't result in negative amortization but are typically short-term solutions. While they help offset high home prices, they pose higher risks for lenders, often leading to slightly higher interest rates. IOMs allow borrowers to afford more expensive homes and benefit from appreciation, but they can be financially detrimental if housing prices drop, leaving borrowers with a mortgage larger than the home's value and making refinancing difficult.

Key Considerations:

1. Nature of IOMs: They can be vital for first-time buyers but can be counter-productive if misused.

2. Payment Options: For a $250,000 loan:

   • Minimum Payment: $804

   • Interest Only Payment: $989

   • 30-Year Payment: $1304

   • 15-Year Payment: $1804

3. Financial Strategy: IOMs can save money and potentially earn more through diversified investments over time.

4. Fixed Periods: Commonly, 30-year IOMs come with a 10-year (30/10) or 15-year (30/15) fixed interest-only period.

5. Suitability: Best for those focused on money management, looking to reduce monthly payments, and not intending to stay in their homes for long.

6. Interest Rate Risks: If base interest rates rise, payments will also increase. Understanding the relationship between interest rates and mortgage payments is crucial before opting for an IOM.

In summary, while IOMs can offer lower initial payments and potential financial benefits, they require careful consideration of the risks involved, especially regarding future payment increases and housing market conditions.