Is the Interest Only Mortgage the Right California Home Loan?

Gil Mackey
LoanBiz Columnist

Many California residents are challenged by homeownership. The cost of housing is very high, there's still competition between potential buyers, and incomes haven't kept up with home values. For some, the interest only mortgage has provided a solution.

California Home Loan Choices: The Interest Only Mortgage

An interest only mortgage should generally be considered a short-term mortgage tool. This can be the perfect California home loan, since the mortgage payments on most homes might otherwise be beyond your reach. The interest only mortgage can serve to get you into the home with the assumption that your income / assets will increase and allow you to eventually refinance into a more traditional mortgage.

While the interest-only loan can allow you to skip the starter home and go right to a better home, it does have its drawbacks. You won't be reducing the principal on the loan. Eventually, the loan will be recast, that is restructured to fully amortize and pay off the balance over the remaining term of the loan. Be sure that you will be able to take on the extra payment when this happens. Counting on home appreciation to add equity while making no principle payments backfired for many homeowners in depreciating markets; many of these were in California. Have a back-up plan for refinancing or paying down this loan before you take it on.

Your loan officer should be able to show you not only what your payment will be in the initial interest-only period, but what it will be when that period expires. Carefully review all your loan disclosures, especially your Truth in Lending (TIL), ask the lender to explain anything you don't understand, and get an amortization table from the loan officer too. Make sure there are no surprises with this loan; when taken by the right borrowers for the right reasons it can be a great loan product.

About the Author
Gil Mackey has been a writer and artist for the past twenty years. In addition to freelance writing, he writes for his local paper, and lives with his two children in Nevada.