Are Interest Only Loans a Bad Idea? Are They Risky? Are They Ever a Good Idea?
There is no “one size fits all” answer to this question. Since every borrower’s situation is different, the appropriateness of an Interest-Only loan must be evaluated on a case-by-case basis.
For the average borrower, however, an Interest-Only loan is probably not a great idea. Most borrowers are looking for nothing other than a means of obtaining financing to purchase a residence, therefore the best bet for these people is something that is safe and predictable. Interest-Only loans are not safe, nor predictable, therefore should be avoided by most average home buyers.
The Risks of an Interest-Only Mortgage Loan
The risk of becoming upside down on one’s mortgage, combined with the possibility of dramatic increases in monthly payment minimums, is reason enough to recommend that Interest-Only loans be considered only as a last resort. With that being said, it is also important to state that there are situations where an Interest-Only loan is acceptable and appropriate. Usually, these loans should be reserved for very experienced real estate investors who are familiar with the mortgage and real estate industries, and who are in a stable-enough financial situation to adequately handle any and all potential increases in monthly payments.
Suitable for Savvy Real Estate Investors
Interest-Only loans are suitable for investors who are in the business of flipping properties, or for those who know for sure that they can successfully re-sell the property within a short period of time, thereby avoiding the imminent increases in monthly payment amounts. Only in these situations would such loans be a good idea to consider, as they allow the borrower sufficient time to use the “saved” monthly payment balance to fix up the home or prepare for its resale.
