Question:

Why get a 7 year Interest Only mortgage?

Answer:

Sometimes, borrowers tend to buy a starter house and buy a larger house later. With a 7-year Interest Only mortgage loan you are likely to avoid the double closing costs and having to move out in several years. IO home loans in general are very flexible loans allowing you to pay principal and interest, or interest only, for several years.

1 to 7-year Interest Only home loans make expensive houses affordable.

1 to 7-year home mortgage with IO payments could allow you to qualify for a larger home. It's some kind of a return for IO loans - due to rising costs in some areas people are relying on the old IO loan to afford a bigger house now.

There are also IO home mortgage loans with longer (10 to 15 years) Interest Only period. However, it is not recommended that you use one until the IO term is over. The reason: do you want to spend 15 years in a house without building any equity and end up with the full loan amount to amortize over remaining 15 or 20 years?

It is true that home values will have gone up substantially, but do you want to take the risk if they didn't? It basically depends on your time horizon and whether you are the investor-type of person. Most home buyers want their homes paid off, free from mortgage debt before retirement and this has proven to be a sound strategy for many.

Why close on an Interest Only home loan and build no equity?

The workings of Interest-Only mortgages allow that you qualify for a larger home now, instead of paying rent, or sticking with a house you don't like enough. In the meantime, there are significant tax benefits accompanying homeownership, so it is understandable why home owners-to-be choose to settle with an IO mortgage and build no equity in the first several years of the loan.

Before the IO period is over, they will refinance anyway, and if prices were appreciating they could have built equity with no out-of-pocket money. If prices were flat, they could still refinance to a new mortgage with little cash. If real estate market was on the low refinancing could be a problem, so homeowners really have to decide if they are taking the risk of depreciation and principal and interest payments.

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