As mortgage rates rise and home prices zoom upward, some home buyers are turning to interest-only home loans.

An interest-only loan allows you to pay just the interest on the mortgage for a set period... usually the first five years. You don't have to pay principal during that time. When the interest-only phase is up, the monthly payments may rise as you begin paying principal over the remaining term of the loan. But, most borrowers expect to sell the house or refinance the loan before the interest-only period ends.

The main attraction of an interest-only mortgage is the lower monthly payment.

"It is becoming something that borrowers and Realtors are asking for, because it allows the borrower to afford more house," reports a senior vice president of product development for a major national mortgage lender.

This is especially true in the last couple of months, as interest rates have risen and home prices have gone nowhere but up. Some home shoppers have found to their chagrin that the houses they could afford in June are no longer affordable because of higher rates. Or rather, they found that their dream houses are no longer affordable with regular, fully amortizing loans. Enter interest-only mortgages, which increased in popularity after rates began rising.

There had been steady demand for the loan type during the three-year refinancing boom that just ended, especially in places with pricey homes on the coasts. They also have been fashionable in parts of the South.

Two types of borrowers

Who gets the loans?

It's borrowers looking to either leverage their cash, and borrowers who want the lowest payments they can get .

For that second group, interest-only mortgages are the home equivalent to auto leasing... sort of. Both are handy ways to get something that you otherwise couldn't afford -- a bungalow in Malibu Beach, a BMW Z4.

The first group that's mentioned consists largely of wealthier people with complex financial lives. They use interest-only home loans to free up the cash that otherwise would go toward principal, and invest that cash where it presumably can bring a better return.

They have the option of paying more than the minimum amount every month and applying that money toward principal. If they don't pay extra, they don't contribute toward their home's equity. They still build equity, though, if the value increases and they eventually sell the house for more than they paid for it.

Have a plan

Lenders offer all sorts of interest-only programs.

If you are determined to get one, it would be best to go through a mortgage broker, who can search for the appropriate loan offering among various lenders. There are many wholesale lenders and investors who provide good, interest only loans. But, you need to know exactly what you're looking for, and where to find it to get the right kind of interest only loan to fill the borrower's needs... and to get them approved at the lowest possible cost.

Interest-only loans are fine financial tools. But like all tools, they work best when they are used for their intended purpose. That means they should be part of a well-thought-out financial plan. The Senior Loan Consultants at Mortgage Match can help you every step of the way with preapproval and getting the right interest only loan. Please click here to learn more.

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