Question:

Is the interest only mortgage a good investment and how to make an interest-only mortgage perform better?

Answer:

If you have used an interest only mortgage as investment vehicle, you probably know how to handle an interest-only mortgage loan to get good results.

However, for consumers who lack this kind of experience or expertise it is useful to know that with interest-only home loans you are not paying only interest on the mortgage. Rather, there is an interest-only option included to a standard fully amortizing loan for 3 to10 years.

When the Interest-Only option runs out of time the loan will allow only fully amortizing payments for the remaining period of the mortgage and you are expected to refinance, sell the house or adapt to the payment increase.

Many borrowers who take an IO mortgage with little or no downpayment will have difficulties selling the house or refinancing if market values are flat, or went down.

Interest Only Mortgages can be successful investments for the right borrower.

Informed borrowers can maximize their cash flow with little risk when getting an IO mortgage. It is a mortgage where you are allowed to make interest only monthly payments whenever you are cash restrained.

To make an IO mortgage work properly, you simply shouldn't exhaust the IO payment option. That is, whenever you can you should make payments towards the principal. If you are unable to do that you will have to make sure the payment adjustment to principal and interest won't come as shock to you.

If you are not an investor, it is unlikely that you can't manage IO mortgage debt and monthly payment increase. However, borrowers for owner-occupied properties may have more troubles managing their interest only mortgages if they didn't make to pay it off at least partially in the IO period.

An Interest Only loan always carries higher rates.

 If you are told that you are getting an interest-only loan with lower rate than the corresponding FRM/ARM loan, it's misleading information. You are being offered an Option ARM, not an IO loan.

All ARMs have lower rates than corresponding FRM loans. Therefore, an IO FRM loan will have higher rates than the IO ARM home mortgage, and Option ARMs always carry the lowest starting rates.

Mortgage rates hit their lowest since 1955. Ask the home loan experts we recommend Quicken Loans how to take advantage of them.
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