Interest only mortgages are a less common type of home loan that many homeowners choose to begin the home ownership process with. As the name implies, borrowers with an interest only mortgage do not pay down their mortgage balance with their monthly payments they only pay interest. This obviously results in a smaller monthly payment. However equity will not be established in the home to use for the future.
If you intend to live in an area where there is rapid appreciation. You can still make money on the sale of your home if this appreciation continues once you move in. Although you will have no equity in your home when you go to sell with an interest only mortgage. Your home may be worth more money and you will still profit. The challenge in making money in an area where there has been appreciation is dependant on how long you are willing to hold out at a higher sale price that may take longer to sell. Your real estate agent should handle these details with you to establish a reasonable sale price.
If you are considering an interest only mortgage you will want to establish a term that is manageable. Many homebuyers choose to have an interest only mortgage that is converted to a traditional fixed or adjustable rate mortgage after a time of 5 10 years. This way, borrowers are not stuck with an interest only loan when they hope to be able to afford the larger monthly payments of a traditional loan further down the road.
Oftentimes homeowners who opt for an interest only loan do so because they will be relocating in a few years and would like to have lower monthly payments in their temporary home. Other times the homeowner is someone who does in fact intend to stay in the home. These buyers often live in an area where the appreciation of their home is expected to beat the amount of equity they would pay down in mortgage payments each month. In this circumstance it is possible for a borrower to live in the home for years and still make money at the time the home is sold because of high appreciation in the property value.