Buying a home with poor credit is just as easy as buying a home with
perfect credit. Years ago, many people with a low credit rating believed
homeownership was unattainable. Fortunately, there are various loan
programs designed to help people with low income, bad credit, and no down
payment purchase a house. Included among these programs are
interest-only loans.

What are Interest-Only Mortgage Loans?

Interest-only mortgage loans became popular in the early 2000's. The
concept of interest-only loans is very unique. Ordinarily, monthly
mortgage payments consist of a portion of the payment being applied to the
principal balance, and a portion applied to the interest. In order to
payoff a mortgage in 15 or 30 years, a specific amount of money must be
paid each month.

On the other hand, if you obtain an interest-only mortgage loan, you
pay only the interest for the first few years. Interest-only periods
vary. Homeowners may opt for a three, five, seven, or ten year
interest-only loan. After the interest-only period ends, the homeowner must begin
making payments toward the principal and interest.

Why is an Interest-Only Loan Beneficial?

If you live in a booming housing market, an interest-only loan may be
your only option for buying a home. Many are attracted to these loans
because the initial mortgage payments are low. For example, a $200,000
conventional loan has a monthly payment of about $1200. With an
interest-only loan, the mortgage would be about $800 a month. Hence, if you are
buying in an overpriced market, affordable living is within reach.

Pitfall of an Interest-Only Loan

Once the interest-only period ends, you still owe the original loan
amount. When homeowners begin making payments towards the interest and
principal balance, mortgage payments may increase 40%. Most homeowners are
unable to afford a mortgage increase. If you plan on living in your
home for several years, an interest-only loan may not be a good option. On
the other hand, if you earn a sizeable income and can afford a higher
mortgage, you may benefit from this type of loan.

Another option involves selling your home before the interest-only
period ends. If home values in your area have increased significantly, you
may capitalize from the equity. However, if the housing market takes a
nosedive and home values decline, you may be unable to sell your home.

Visit ABC Loan Guide for advice about
mortgage loans for people with bad credit.

View all of our Recommended Bad Credit Mortgage Lenders.