Interest-Only Mortgage Loans with Bad Credit—3 Things to Watch Out For
Interest-only mortgage loans can be beneficial for buyers who either want to clean up their credit before taking out a traditional mortgage or are temporarily unable to afford a full mortgage payment. However, they have their disadvantages. Buyers who are considering taking out an interest-only mortgage should keep a few things in mind before making their decision:
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You Will Not Earn Equity on Your Home
When you only pay the interest on your mortgage, you are simply renting your home from the mortgage company. Interest-only payments do not whittle down the principal balance on the home in the way that fully-amortized payments do, so, for as long as you make interest-only payments, you will not earn any equity on your home.
There Are Two Types of Interest-Only Loans
The first is interest-only for a set period of time, usually five years. After the set period of time ends, the mortgage will then convert to a traditional mortgage, and you will be required to make fully-amortized payments. This can be beneficial to borrowers who are temporarily unable to afford fully-amortized payments.
The second is a solely interest-only loan. With this type of loan, you only pay the interest for the lifetime of the loan, which is usually a 15 or 30-year term. At the end of the term, you will be responsible for a balloon payment—the entire original amount borrowed. This leaves you with two options: you can either pay the balance or refinance it. This type of loan can be beneficial for borrowers who simply want to clean up their credit before taking out a traditional mortgage. You can make timely payments for a few years and then refinance the principal amount for a better interest rate than you would have received before. However, if you refinance, you will again be responsible for the same upfront costs that were required when you took out your interest-only mortgage.
Unreasonably High Interest Rates
Mortgages are different from other lines of credit because they are secured; if you cannot make your payments, they can seize your home as repayment. This means that you should get a reasonable interest rate on a traditional mortgage even with bad credit.
Shop around before taking out any mortgage and see what interest rates different companies will offer you.
Recommended Bad Credit Mortgage
Lenders: Top Recommended Companies To Refinance With:
(updated ):
Act Now! Lower your monthly mortgage payment!
- Competitive rates and no hidden fees
- Bad Credit OK
- New Purchases, Home Equity & Refinance
- One dedicated mortgage banker from first call to closing
- Quick Application with worthwhile results
If you are looking for a mortgage loan but have "less than perfect credit" this company has options for people with credit problems. Complete a short form and get one dedicated mortgage banker from first call to closing with a simple, straightforward process.
Mortgage rates are still low. Refinance & Lower Your Payment!
- Get Started on a Lower Payment Now!
- America's #1 Online Lender
- Save More and Spend Less!
- No Obligation and Free Expert Advice Another Great "bad-credit" Mortgage Company! QuickenLoans is also a competitive mortgage company for people with all types of credit including poor credit. Refinance or get new mortgage offers from this reputable Web based mortgage lender.
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