Interest-Only Mortgages
Whether you are buying a house or refinancing your mortgage,
this information can help you decide if an interest-only mortgage
is right for you.
An “interest-only” mortgage allows you to pay only
the interest on the money you borrowed for the first few years
of the mortgage. This is known as the “interest-only
period” (for example, the first 5 years of the loan). If
you only pay the amount of interest that’s due, once
the interest-only period ends:
• You will still owe the original amount you borrowed.
• Your monthly payment will increase – even if interest
rates stay the same – because you must pay back the principal
as well as interest.
• Ask what the payments on your loan will be after
the end of the interest-only period. If you are considering
an adjustable rate mortgage, ask about what your payments can
be if interest rates increase.
Home Equity
Home equity is created when the value of your home increases
and/or when you reduce the amount you owe on your home through
your loan payments. If your home does not increase in
value and you make interest-only payments, you are not building
equity. And, if you make only the minimum payments on
a mortgage with a payment option feature, you may be increasing
the amount you owe because unpaid interest is added to the
loan balance. This may make it harder to refinance your
mortgage, or to receive funds from the sale of your home. In
fact, if the amount you owe on your home, along with the costs
associated with selling it (such as the real estate sales commissions
and closing costs) exceeds the sales price, you will not receive
any cash when you sell, and will have to pay additional funds
to your lender or to other parties when you pay off your mortgage.
Prepayment Penalties
Some mortgages have prepayment penalties. If
you sell your home or refinance your loan during the prepayment
penalty period, you could owe additional fees or a penalty. Ask
whether your mortgage has a prepayment penalty and, if so,
how much it can be. Most mortgages let you make extra,
additional principal payments with your monthly payment --
this is not “prepayment” of the entire loan,
and there usually is no penalty for these extra amounts.
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