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Interest Only Mortgages: A Risky Real Estate Move?

Jun 6, 2008
Well, let's examine this information, one piece at a time. The first piece to examine is the basis for the desired interest only mortgage product.

What type of investor is looking for the interest only mortgage? Many of your real estate investors are business people, looking for a way to maximize their profit, while minimizing their capital investment.

It is for these investors that the interest only mortgage options should be used. The borrowers are business people, with business plans, and enough knowledge about the workings of commercial and mortgage loans, to understand a good investment from a bad one.

The commercial mortgage industry is a huge market and the interest only mortgage product serves this market segment well. Today, however, we live in a society that encourages instant gratification, and the concept of me, me, and me.

In this society of self, this new player has emerged, the interest only mortgage, and he's a big hit with those self-gratifiers. The interest only mortgage allows a buyer to purchase more for less.

More houses for less money are the concept being used to sell this interest only product to the average consumer, and I don't think impulse buying is a good thing when it comes to your mortgage. An interest only mortgage cannot serve a good purpose, except for the right consumers under the right circumstances.

Those circumstances are few, and the average consumer doesn't fit into the category most of the time. The interest only mortgage is not a risky move, if you are business oriented, with a business purpose, beyond that of living above your financial means.

I still am not an advocate of the interest only mortgage, but for some situations they are the best option. In a business setting, when many factors have been thoroughly discussed, and the interest only option has proven itself to be the best choice, I think the interest only mortgage should be used.

But this option should remain as the knowledge of many other financial options among the masses, virtually unknown.

A tool being used by many commercial lenders to offset the risk involved with the commercial interest only mortgages is known as LIBOR. The LIBOR has traditionally affected more of the commercial market than the private sector.

As the private market moves into a bigger risk sector than ever before, the LIBOR will loom as a larger figure in the ratio used to determine the interest to risk factor that your local banker, mortgage company, or finance company will assume.

The interest only mortgage option is a bit riskier than the traditional mortgage products, in that it requires little or no down payment, and over the course of the mortgage, the interest is the only initial monies collected. That means at the end of the term, say 5 years for most, the buyer still owes the same amount of principal.

This is where LIBOR begins to play a bigger picture. Commercial loans, primarily an investment tool, have traditionally been considered the bigger risk, since these loans weren't providing housing for the borrower. These new age borrowers aren't really that committed to these homes, either.

Most are using the interest only option as an economical and inexpensive way to fund their ability to turn a profit with little or no investment. Each option means a bigger risk for the lender; and LIBOR helps to set risk percentages and provide stable financing options for the lender.

The commercial interest only LIBOR mortgages are for commercial borrowers. These borrowers are investing in residential unit complexes.

In other words, they're borrowing to buy apartment complexes, not individual homes; nonetheless, they too are being offered the interest only options and the interest rate for these commercial interest mortgages is set by the LIBOR rate plus a certain percentage above.

It is for these commercial investors that the interest only loan options should be used. The borrowers are business people, with business plans, and enough knowledge about the workings of commercial mortgage loans, to understand a good investment versus an impossible dream.
About the Author
Uchenna Ani-Okoye is an internet marketing advisor and co founder of Free Affiliate Programs

For more information and resource links on home loans visit: Home Loan Lending
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