How Does Interest Only 2nd Mortgages Work

In a traditional second mortgage, a borrower pays a fully-amortized monthly payment. This means that they are paying the exact amount necessary in order to pay their second mortgage off in full by the end of their term. Interest-only second mortgages differ in that they do not require fully-amortized payments at the beginning of the mortgage term. This article explains how interest-only 2nd mortgages work:

Interest-Only Payments
For a period of time established by either you or your lender -- usually a few years -- interest-only second mortgages only require that a borrower makes monthly payments on the interest accrued on their loan. This means that the borrower is not required to pay any amount on the principal. This makes for monthly payments that are considerably lower than fully-amortized payments.

Conversion to a Traditional 2nd Mortgage
After the term of interest-only payments, the loan converts to a traditional 2nd mortgage. This means that you will be responsible for fully-amortized payments for the remainder of the mortgage’s term.

Benefits and Disadvantages
Interest-only second mortgages can be very beneficial to borrowers who are looking to borrow money in order to pay for improvements on their home before selling it. This may allow the borrower to earn all of the borrowed money back when the home sells at a higher value because of their investment. However, interest-only second mortgages may not be wise for any reason other than this. After the interest-only payment term ends, monthly payments will be considerably higher than they would on a traditional 2nd mortgage. Borrowers not looking to sell their home should choose the shortest interest-only term possible.

Borrowers should remember that second mortgages use their home as collateral. This means that, if you cannot make your payments, your lender has the right to seize your home as repayment. Borrowers should never take out a second mortgage unless they are certain that they can afford the payments on both their first and second mortgages.

By : ABC Loan Guide