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Home Mortgage Loans For People With Bad Credit - Pro's And Con's Of
Interest-Only Loans
By: Carrie Reeder
Buying a home with poor credit is just as easy as buying a home with perfect
credit. Years ago, many people with a low credit rating believed homeownership
was unattainable. Fortunately, there are various loan programs designed to help
people with low income, bad credit, and no down payment purchase a house.
Included among these programs are interest-only loans.
What are Interest-Only Mortgage Loans?
Interest-only mortgage loans became popular in the early 2000's. The concept of
interest-only loans is very unique. Ordinarily, monthly mortgage payments
consist of a portion of the payment being applied to the principal balance, and
a portion applied to the interest. In order to payoff a mortgage in 15 or 30
years, a specific amount of money must be paid each month.
On the other hand, if you obtain an interest-only mortgage loan, you pay only
the interest for the first few years. Interest-only periods vary. Homeowners may
opt for a three, five, seven, or ten year interest-only loan. After the
interest-only period ends, the homeowner must begin making payments toward the
principal and interest.
Why is an Interest-Only Loan Beneficial?
If you live in a booming housing market, an interest-only loan may be your only
option for buying a home. Many are attracted to these loans because the initial
mortgage payments are low. For example, a $200,000 conventional loan has a
monthly payment of about $1200. With an interest-only loan, the mortgage would
be about $800 a month. Hence, if you are buying in an overpriced market,
affordable living is within reach.
Pitfall of an Interest-Only Loan
Once the interest-only period ends, you still owe the original loan amount. When
homeowners begin making payments towards the interest and principal balance,
mortgage payments may increase 40%. Most homeowners are unable to afford a
mortgage increase. If you plan on living in your home for several years, an
interest-only loan may not be a good option. On the other hand, if you earn a
sizeable income and can afford a higher mortgage, you may benefit from this type
of loan.
Another option involves selling your home before the interest-only period ends.
If home values in your area have increased significantly, you may capitalize
from the equity. However, if the housing market takes a nosedive and home values
decline, you may be unable to sell your home.
About the Author:
Visit ABC Loan Guide for advice about mortgage loans for people with bad credit.
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