Home Equity

Interest-Only Home Equity Lines of Credit and Second Mortgages

Interest-only home equity loans are second mortgages that you pay only interest for the first 3, 5, or 10 years of the loan, significantly lowering mortgage payments during the first few years. Home equity lines of credit have been increasing in popularity because the mortgage lender only requires the borrower to make an interest only payment that tends to be less than the standard principal and interest payment.

Interest-only second mortgage loans:

• Increased cash flow with reduced mortgage payments during the first few years than conventional mortgages, because initially you're only paying interest.

• Increased purchase power to buy a higher-priced home than you could otherwise afford.

• Can help you in an emergency.

• Lower monthly payments with debt consolidation.

• Enable you to access funds for investing in a rising real estate market.

Interest only equity loans are not just for purchase loans. Many people refinance with interest-only loans to lower payments and consolidate debt.. There are also several varieties of interest-only home equity loans or second mortgages. These work in a similar way as those offered for first mortgages, including lower payments for affordability during the first few years of the loan.

Interest-only loans can be good for people whose income is sporadic, either because they are self-employed, are paid on commission or because they receive annual bonuses. This allows them to pay only interest during lean months, and make higher payments against the principal later on when they get their bonuses or commissions.

"These loans can be of value for people who want to save or invest the money they would have paid in principal," said Keith Gumbinger, vice president of HSH Associates, a publisher of loan information in Butler, N.J. Thus, interest-only loans also make sense for investors who invest the money they save into their stock portfolios. Additionally, they could work well for real estate speculators who buy property only to sell it later on when the property appreciates in value.

According to Brendon Daly, of BD Nationwide, "there is usually no prepayment penalty on interest-only loans, but look out for early termination fees."

In short, interest-only loans are for those who are more interested in freeing up immediate cash flow than in building equity in the home.