If you are a considering using an interest-only mortgage to finance your home, it is important to understand the risk involved with these mortgages. Interest-only mortgages are dangerous because they allow you to qualify for more mortgage than you can actually afford when the interest only period ends. Here is what you need to know about interest-only mortgages to avoid losing your home.

There are advantages to financing your home with an interest-only mortgage, at least initially. Interest-only mortgages give you a low monthly mortgage payment and the largest mortgage interest tax deduction. The thing many homeowners with interest only mortgages neglect to realize is that interest-only mortgages are not interest-only forever; at the end of the interest-only period the mortgage lender will add the principle back into your payment and adjust the interest rate. When this happens the monthly payment amount will go up significantly.

Interest-Only Basics

Interest-only mortgages are interest-only for a period of time specified in the loan contract, usually five years. At the end of the interest-only period the mortgage reverts to an adjustable rate mortgage amortized with a term five years less than a typical mortgage. What does this mean for your payment amount? The monthly payment will be higher because you now have five years less to pay back the same amount of loan. Adding insult to injury the mortgage lender will adjust the interest rate to whatever financial index your loan is tied to and add their premium markup at regular intervals.

Interest-only mortgages were intended as a short-term fix to a financial need; many homeowners abuse these mortgages because the don’t understand them or they think their income will go up enough to support the full payment amount at the end of the interest-only period. The problem comes when their income does not go up and they cannot afford the higher monthly payment and do not qualify to refinance the mortgage. If these homeowners are unable to sell their homes they will lose their homes to foreclosure.

To learn more about your mortgage options and how to avoid common homeowner mistakes, register for a free mortgage guidebook using the link below.

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Louie Latour specializes in showing homeowners how to avoid common mortgage mistakes and predatory lenders. For a free copy of "Mortgage Refinancing: What You Need to Know," which teaches strategies to find the best mortgage and save thousands of dollars in the process, visit Refiadvisor.com.

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