Do You Know Everything You Need to Know About Interest-Only Mortgages? - RGRMarketing.com

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June 19, 2018 | By RGR Marketing Blog

Mortgage 101: Interest-Only Mortgages

Interest-only mortgages are not commonly considered by home buyers because the media portrays them as bad or high-risk loans. But, how they’re portrayed is not necessarily an accurate assessment. Interest-only mortgages have their pros and cons just like every other mortgage instrument, and some buyers find this type of mortgage to be ideal for their needs.

If you’re in the mortgage industry, are you selling interest-only loans as well as you should be? Do you know enough about them to compel a client’s interest? While not as popular as conventional mortgages, interest-only loans are a viable option for some buyers. So, knowing as much as you can about them is important for serving a broader range of potential mortgage clients.

What Are Interest-Only Loans?

An interest-only loan is one in which the borrower only pays the interest on the loan for the first part of the repayment period, typically a duration of ten years. During this time, nothing is paid to the principal unless the borrower decides to. Therefore, the monthly payments on these types of loans are usually several hundred dollars less than that of conventional loans, which feature larger monthly payments because the funds apply to both the interest and the principal.

Who Is the Ideal Borrower for an Interest-Only Mortgage?

Interest-only mortgages are popular among first-time buyers because of the substantially lower payments. When transitioning from renting to owning, the larger financial responsibility can be difficult to get accustomed to. Many first-time buyers are essentially working for their homes, so little money is left over to help deal with emergency expenses.

But, when a borrower chooses an interest-only mortgage, their monthly payment is lower, thus allowing them more financial wiggle-room during the first decade of owning a home. Borrowers who are expecting their income to rise over the next ten years tend to gain the most benefits from using this type of loan because their income will be much higher when the loan transitions.

What Happens When the Interest-Only Period Is Over?

When the interest-only period is over, the mortgage payment will be reset to include both principal and interest. While the monthly payment remains static during the interest-only period, it will change once that period is over, sometimes quite dramatically. The mortgage’s original fixed interest rate is usually replaced with a variable interest rate for the remainder of the loan.

The idea with this type of loan is that over the ten years the borrower is paying interest-only payments, they will get a better grasp on homeownership and an increase in their salary that will make affording the new payment easier for them.

Why Are Interest-Only Loans Considered Risky?

Some financial experts believe that interest-only loans are risky because during the time the borrower is paying just the interest, they’re not building any equity in their home. And, if interest rates climb sharply when the loan transitions, then the amount owed every month can be substantially larger than what the borrower was paying previously – and there’s always the risk that the borrower might have difficulty affording the new payment amount.

Lastly, borrowers who pay only the interest on their loans for the first ten years wind up spending more for their homes than those who buy using conventional loans. This is because no principal is being paid down, so the amount being paid to the interest doesn’t decline until the principal amount starts to decline.

Steering Your Mortgage Clients in the Right Direction

Interest-only loans can also be risky because they can give the borrower the impression that they can afford more home than they realistically can. Therefore, it is important for you to provide your client with the most information you can to help them determine whether this type of loan actually suits their needs now, and perhaps more importantly, in the future.

Ready to try flooding your sales pipeline with new, targeted leads? Get in touch with RGR today, and we’ll help you to purchase high quality, exclusive mortgage leads so you can boost your business’s bottom line today.

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