What Is An Interest-Only 2nd Mortgage?

Interest-only second mortgages differ from traditional second mortgages in that they do not require fully-amortized payments for the entirety of their term. Interest-only second mortgages have a certain period of time when monthly payments are based solely on the interest accrued on the loan.

The period of time in which interest-only payments are allowed is established by either the borrower or the lender. The interest-only period is usually between one and five years.
However, after the period of interest-only payments, the loan converts to a traditional second mortgage. The borrower is then responsible for fully-amortized payments for the remainder of the loan’s term. This means that you would have to pay off your principal in a shorter amount of time.

Interest-only second mortgages can be beneficial to people who are planning to sell their home. They can take out a second mortgage, make necessary improvements to the home, then sell it and earn the money to pay back both of their mortgages. Often, home improvements will considerably raise the value of a home.

Borrowers who are considering entering into an interest-only second mortgage should keep in mind that their monthly payments will be higher after the interest-only term than it would be on a traditional second mortgage. It is advisable that borrowers not planning to sell their homes should choose short interest-only terms. Borrowers should be certain that they will be able to pay the monthly payments on both of their mortgages. Both first and second mortgages use your home as collateral. If you fail to make your payments on either, your lender could seize your home as payment.

Borrowers should also be certain that their interest-only second mortgage does later convert to a fully-amortized mortgage. Solely interest-only second mortgages will require a balloon payment at the end if its term – the entire principal amount originally borrowed.

Interest Only Mortgages are becoming more common as consumers find various ways to get into a home.

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