Are interest only mortgages a good idea?

Interest-only mortgages are a special mortgage type that allows buyers to buy more house with less money. With a standard mortgage payment, each month some money is allocated toward the principal, or the original purchase price of the home, and the rest goes toward interest. Early in a home loan, most of the monthly mortgage payment goes toward the interest portion of the loan. An interest-only loan allows buyers to pay only the mortgage interest. Such loans can be a useful tool for those who need low initial payments or who expect to own a home for only a short time.

Unfortunately, interest-only mortgages can also lead to problems if not used wisely. This is particularly true if the housing market declines: The loss of equity can lead to a situation where you owe more than the home is worth. Other common problems arise when trying to refinance mortgages with little equity. Closing costs and other fees can result in dramatically increased monthly payments.

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