Lately, the subject of Interest Only ARM's have received lots of press. For those who do not know what this is, I will explain. An ARM is an Adjustable Rate Mortgage; these mortgages are fixed for a certain period (most commonly 3 or 5 years), then "adjust" either up or down depending on where the market is at the time of maturity. Adding an Interest Only feature allows you to only have to pay the Interest portion, which reduces your monthly expenses for the duration of the fixed period.
First, lets look at the "pro's". An Interest Only ARM is ideal for a borrower purchasing their first home in that it allows you to keep your new payment down to a minimum while still realizing the tax benefits of home ownership and increased equity as the property value appreciates. Another aspect is the fact that as you make payments above your minimum interest only payment, you decrease your principal balance, which in turn lowers your minimum payment the following month since you can't pay interest on principal that doesn't exist.
Other people that can benefit from Interest Only loans are:
1. Borrowers working on commission whose may have large commissions where they can make a substantial principal payment from time to time while keeping monthly expenses lower.
2. Borrowers starting in the work force who will most likely have salary increases over the next few years for when they are ready to convert to a fixed mortgage or upgrade to a larger home.
3. Borrowers who have a definitive amount of time in which they will be moving such as those in the military or those retiring soon.
4. Borrowers seeking to purchase (or those who own) investment properties. This allows you to maximize cash flow (lower monthly payment = more money in your pocket).
5. Borrowers needing additional cash flow for a fixed period, such as those with children in college.
If you fit any of these categories and would like to discuss how you can benefit from an Interest Only Mortgage.
Now lets look at some of the risks associated with interest Only ARM's.
If you are planning on staying in your property long term (i.e. empty nesters), this most likely is not a loan for you. There is no way to predict what rates will be in 3, 5, or 7 years and this could put you in a challenging financial position if your loan matures and your new rate is higher and less affordable for you.
Many people use an Interest Only payment to qualify for a larger mortgage. On one hand, this seems like a good thing, however if there is no plan for increased income as the ARM matures, this could spell trouble for the home owner. Many "experts" have predicted an increase in foreclosures over the next several years as borrowers that should not have utilized an ARM begin to see payments much higher than they originally had.
Now is a great time to take a look at your financial picture because today you can get an interest Only ARM at a great rate is that is what your situation dictates. As well, if you are thinking long term and realize the need to convert to a fixed rate mortgage, rates are once again at record lows which was not expected by any of the "experts".
If you know of anyone that can benefit from knowing more about how their mortgage works, please do me a favor and send this link to them.
Until next time...
Anthony
www.AtoZLender.com
