Interest-Only mortgages, also called "Interest-First" mortgages, have been around for a long time, but their popularity has recently exploded. Originally, interest-only mortgages were only available in the non-prime market. Now, they are available as conforming loans and can be part of a wide range of loan programmes, such as adjustable-rate mortgages, loans with terms of 40 or 50 years, stated-income loans, and loans for people with credit scores as low as 540.
Before you agree to an interest-only mortgage loan, the first thing you should know is that YOUR PAYMENT WILL CHANGE. (read: YOUR PAY WILL GO UP.) With an interest-only loan, your first payments go toward the interest, not the principal. After a certain amount of time (usually between two and fifteen years), the lender will want you to start paying back the principal as well as the interest. Interest-only loans can be a very useful way to pay for things, especially purchases, as long as you know that your payments will change. With a lower monthly payment, you can spend more on your dream home, and you can always refinance later to a regular loan that pays off over time.
There are a few things to keep in mind. Some dishonest lenders go after first-time homebuyers by telling them on paper that they can afford that beautiful seven-bedroom mansion. The mortgage they may be thinking about could have a fixed rate for only two years (and then go up by 2% or 3%), be interest-only for the first two to five years, and have a prepayment penalty that would cost them thousands of dollars if they wanted to refinance or sell in the first two to five years of the loan. If the new homeowners can't handle the sudden payment, they may be forced into a very bad financial situation.
A lot of people can get by with interest-only mortgages. Just make sure you do your research and know everything there is to know about the loan you are given.
