Second Mortgage Loans

If you are thinking about getting an interest-only mortgage loan because you need to save money on your monthly mortgage payments, there’s an aspect of these kinds of loans that, while seldom mentioned, is definitely something of which you should be aware.

Often there is a very small down payment required for an interest-only loan. And, since you are not making any payments against the principal of the loan during the interest-only period of the loan, you are not building up additional equity through the pay-down of your principal.

This means that the only real hope you have of gaining equity in the property is through inflation and other market conditions which normally increase the value of property. Keep in mind that there is never a guarantee that home prices will go up and it is even possible for home prices to fall for a variety of reasons.

This means that there is the possibility that for a number of years the equity in your home could remain at whatever level was established by the original down payment you made on the property.

This situation could cause a problem if you are ever in need of cash and were planning to take out a second mortgage or an equity mortgage or an equity line of cash. Often it is necessary for a property to have at least 20 percent of its value in equity before second mortgage loans or equity home loans are approved.

If you only put down, say, 5 percent cash when you purchased the property, and you have only been making interest-only payments on your mortgage, and housing prices have stalled or even declined, then your equity or loan-to-value ratio may be too low to qualify for a second mortgage or for an equity loan or for an equity line of credit.

There are drawbacks and trade-offs for any loan that you get. If your situation has you considering an interest-only mortgage loan this is simply one more piece of information that you should weigh before making your final decision.