It's just as easy to buy a home with bad credit as it is with good credit. Years ago, many people with bad credit thought they could never own a home. There are loan programmes that can help people buy a house even if they don't have a lot of money or a good credit score. Interest-only loans are one of these programmes.
What are mortgage loans that only pay the interest?
In the early 2000s, people started to use mortgage loans that only paid the interest. Interest-only loans are a very different kind of loan. Most of the time, a portion of your monthly mortgage payment goes toward the principal balance and another portion goes toward the interest. A certain amount of money must be paid each month to pay off a mortgage in 15 or 30 years.
If you get an interest-only mortgage loan, on the other hand, you only pay the interest for the first few years. Interest-only periods are different. An interest-only loan can last for three, five, seven, or ten years. After the interest-only period is over, the homeowner will have to start paying both interest and the loan's principal.
Why is a loan with only interest good?
If the housing market where you live is booming, an interest-only loan may be your only way to buy a home. Because the first mortgage payments are low, many people are interested in these loans. For example, a conventional loan for $200,000 has a payment of about $1,200 per month. With an interest-only loan, the monthly mortgage payment would be about $800. So, even if you buy in an overpriced market, you can still live affordably.
Problem with a loan that only pays interest
After the interest-only period is over, you still have to pay back the full amount of the loan. When homeowners start paying both the interest and the principal, their mortgage payments may go up by 40%. Most homeowners can't afford a rise in their mortgage. If you plan to live in your home for more than a few years, an interest-only loan might not be the best choice. On the other hand, if you make a good living and can pay for a higher mortgage, this type of loan could be good for you.
You could also sell your home before the end of the interest-only period. If home prices have gone up a lot in your area, you may be able to use the equity to your advantage. But if the housing market crashes and home prices go down, you might not be able to sell your house.
