When used correctly interest only mortgages are a useful tool for a short-term financial need. When abused, interest only mortgages can quickly land a homeowner in financial hot water. Here is what you need to know about these risky mortgage loans.

Interest only mortgages offer payments that are based solely on the interest due for a given month. During the period of time that is interest only the mortgage payment will be much lower because there is no loan principal included in the payment. You should note that these loans are not interest only forever; at the end of the interest only period the lender will add principal into the mortgage payment and that amount will increase significantly. The duration of the interest only period is typically one to five years.

The danger in using an interest only mortgage is the temptation to purchase more home than you can actually afford. It is very easy to qualify for larger amounts with an interest only mortgage than you could qualify for with a traditional mortgage; as a result many homeowners find their budgets stretched to the limit when the interest only period ends. If you are unable to keep up on the payments once the interest only period ends you could lose your home to foreclosure.

If you are in the process of taking out an interest only mortgage, you need to make sure that at the end of the interest only period, the mortgage converts to a fully amortized loan and does not terminate with a balloon payment. If you take out an interest only mortgage that ends in a balloon payment and are unable to refinance or sell your home at the end of the interest only period, the lender will foreclose and take your home.

Interest only mortgage loans are a valuable financial tool when utilized correctly. To learn more about using interest only mortgages while minimizing the financial risk and avoiding common mortgage mistakes, register for a free mortgage guidebook.