The interest-only mortgage is perhaps the least popular home loan in Arizona, and the rest of the United States for that matter. It is not an accident that its market has dried up. Interest-only loans were some of the catalysts of the 2008 financial crisis. The borrowers who took them out woke up to the reality that they really could not afford their payments once their mortgages began to amortize.
Interest-only mortgages disappeared for a while, but they have made their return. Any honest mortgage lender in Tempe, Surprise, Tolleson, and Litchfield Park would admit that their current iterations are totally different from their counterparts in the 2000s.
Since you might encounter these rare mortgages as you shop hard for home loans, it is imperative to understand what they really are. For starters, let us dispel these common myths about the contemporary interest-only mortgage.
It Has Lax Qualification Requirements
The interest-only mortgage attracts the budget-conscious because of its significantly low monthly payments. However, it would wrong to assume that qualifying for it is a walk in the park. Chances are that your application will be denied if your credentials are not good enough to take safer and more common mortgages.
Loan underwriters are extra cautious about interest-only mortgage applications to avoid a repeat of the economic meltdown 12 years ago. You must be able to provide proof that you could handle the highest possible future interest rate and the fully amortized payment to get approved.
Also, you may be asked to put down anywhere 10% to 30%, so you could borrow less and build considerable equity on the property outright.
It Restricts Principal Payment During the Interest-Only Period
Throughout the interest-only period, you will be required to pay just the interest of your mortgage monthly. But your lender is unlikely to stop you from making any extra payment that will go toward the principal.
Then again, you have to read the fine print to understand the prepay policy of your lender. You may be penalized if you pay a certain portion of your principal balance or pay off the loan completely over a specific period.
It Can Work Wonders for Most Borrowers
Most, if not all mortgage borrowers, would want to pay as little as possible every month to earn the title of the home. That goal is more attainable with the interest-only loan. But even if you qualify for it, it does not mean that you should take it and that it is right for you. The interest-only mortgage is sensible only to select demographics.
The interest-only home loan is most beneficial to borrowers who are dead set on minimizing their monthly payments, who have an irregular flow of income, who have yet to find takers of their listed previous house, who move around a lot but also want to invest in a promising real estate market, and who want to spend their cash on other investments most of the year. If you do not fit the bill, apply for other mortgages instead.
The interest-only mortgage definitely does involve a bunch of risk, but so can other home loans. If you fail to do due diligence, any mortgage could drive you to delinquency and years of financial ruin.