Interest-Only Mortgages: A Flexible Option with Risks
In the realm of home financing, interest-only mortgages present a unique blend of short-term affordability and long-term considerations. If you're contemplating this type of mortgage, understanding its mechanics, benefits, and potential pitfalls is crucial. What is an Interest-Only Mortgage? Interest-only mortgages allow borrowers to pay only the interest component of their loan for a predetermined period, usually 7 to 10 years. During this time, you won't pay down the principal balance. After this phase, the loan reverts to a standard amortizing mortgage, where both principal and interest are paid, typically at a variable rate. A Brief Historical Context These mortgage types gained traction in the early 2000s, offering immediate low payment relief. However, they played a significant role in the 2007 housing crisis and subsequent recession, leading to stricter regulations…