Should You Use an Interest Only Mortgage to Buy a San Francisco Home?

Should You Use an Interest Only Mortgage to Buy a San Francisco Home?There are many hurdles that San Francisco homebuyers have faced recently. One of the most concerning for a majority of potential buyers is affordability. There have been several factors in purchasing a home in almost every city across the country that have made affordability just a little more difficult in the last few years. 

With the right strategies and dedication to purchasing a home, a buyer can afford a home. Many San Francisco buyers have been looking for alternative solutions to get into a home and begin the dream of building wealth through their investment and creating a space that is all their own, a comforting place they want to run to at the end of a busy day. One option some buyers look at is an interest-only mortgage. 

This type of mortgage should be looked at carefully by homebuyers. You want to do extensive homework. In some cases it can be a good opportunity to get into a San Francisco home, in some cases, the risk is far beyond the reward. 

What is an Interest Only  Mortgage? 

An interest-only mortgage is a home loan where the borrower's first monthly payments are made only on the interest of the loan for a specified time. The most common initial timeframe is about 7 to 10 years. When the interest-only period ends the borrower's payments increase to interest and principal just like you would pay on a traditional conforming mortgage loan

The Logistics of Interest-Only Mortgages

It is common for an interest-only mortgage to have an adjustable interest rate after the first years of interest-only payments. Since a borrower begins payments only paying the interest on the loan, this loan works differently than traditional ones. 

The borrower is making smaller monthly payments but they are not putting any money toward the principal of the home. The principal is the actual purchase price paid on the home. So the amount owed on the home does not change in the first years you pay only interest. This results in a larger payment requirement once the interest-only timeframe ends and the principal payments kick in. 

This is a riskier loan for both the lender and the borrower. The lender runs the risk of not getting any principal paid back on the loan and the borrower ends up paying more interest than they would with a traditional loan. Often this results in stricter qualifications including a high credit score, strong income and employment history, and adequate value in the home to secure the loan. 

Should You Consider an Interest-Only Loan?

An interest-only loan has some benefits and plenty of drawbacks. This type of loan is a possibility for someone who knows they will be making more money in the future. There is more interest paid in this type of loan as compared to taking out a standard mortgage. It only should be looked at as a viable option for someone who has the opportunity to purchase a highly sought-after property in San Francisco and know they will be making plenty of money to cover their payments by the time the payment requirement increases.

This person will also have the mindset that they plan to stay in the home for longer than the interest-only period on the loan plus about five years. The five-year mark is the average estimate before a homeowner starts having the potential to make money after purchasing a home when they are making payments on the principal. 

It is always a great idea to talk with a financial advisor before taking on a loan you are not familiar with. You want to ensure your reward is always greater than your risk. 

For more information about purchasing a home in San Francisco, I am here to help. Contact me any time to get started searching for homes in the city that meet your search criteria. I can help find a home you will love in San Francisco. Contact me with any San Francisco real estate needs. 

Post a Comment