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For a first time home buyer or any buyer for that matter, the process of buying a home can seem like a three ring circus. You have to sign here, jump through this hoop here and balance this here. Most buyers wouldn´t be surprised if the bank asked them to put a ball on their nose and speak only when spoken to.
As if the mortgage process wasn´t complicated enough, an unconventional type of mortgage is beginning to gain in popularity. The interest-only mortgage is becoming the new, fashionable way for those with fast, up and coming careers to buy a home, but they can lead to major problems down the road.
With an interest only mortgage, all you pay on your mortgage for the first 5 or 7 years is the interest. This lowers monthly payments dramatically. But at the end of the period, you have the choice of paying off the mortgage in full, refinance your mortgage or start to pay the balance. Most people end up having to choose the last option and that means a monthly mortgage payment that skyrockets, usually out of the realm of payability. So, why would anyone saddle themselves with this type of mortgage? Let´s take a look at the plusses and minuses of having an interest only mortgage.
· An interest only mortgage allows you to save a lot of money over a short period of time. Since you´re paying so much less on your mortgage during the grace period, it allows people to invest that extra money and hopefully turn some amazing profits. But as you can imagine, investments don´t always work out. The interest-only mortgage is a gamble to begin with and when you add in a second gamble of investing, the chances that you´ll come out on top are slim.
· An interest only mortgage is good if your career is on the fast track. If you are confident that your career will be growing and expanding at an exponential rate over the next 5-7 years, then an interest only mortgage might work for you. Since you pay so little for the first few years, people can qualify for higher amounts of financing and, in turn, buy nicer houses then they normally would with an old-style mortgage. But again, there is a big trap here. If disaster strikes and you lose your job, you´re stuck with a mortgage that is going to double or triple in monthly payments once your grace period runs out. Again, you´re gambling on your future.
· The interest only mortgage has been popular over the years for folks who live on bonuses more than salary. The flexibility of the interest only mortgage allows a person to only pay a little during the months when they don´t get a bonus and then pay huge chunks of their mortgage when they get their bonus. Until very recently, these were really the only type of wage-earners that used interest only mortgages, but they have been gaining in popularity over the last decade. There is less of a risk of defaulting on your mortgage if you fall into the bonus earner category.
· Finally, the interest only mortgage can work if you´re due to inherit a significant sum of money in the near future. If a trust is coming due or a family member has a living will that allows you to receive a certain sum at a particular age, you can get an interest-only mortgage now, pay less per month now and then pay off the mortgage or, at the very least, have enough money to make the large monthly payments once the principal comes due. This method has the least amount of pitfalls, but inheritances get challenged all the time in court and just because your money is being held up doesn´t mean that your mortgage payment will be. It´s a smaller risk, but still a risk nonetheless.
The trap of the interest-only mortgage can be a tough one to resist. The idea of paying so much less now and having the principal come due after a particular amount of time can be very tempting, especially if you see your job prospects improve in the near future. But you should think twice before signing on that dotted line. Reality changes and you could be caught with a giant monthly payment that you simply can´t meet.
GBrey | 
