For many, the American Dream is home ownership. And many are trying to purchase homes in ways that were unthinkable just 20 years ago. People are also interested in buying "more house" for their money. This is where interest only home loans come in. They allow people who would not normally be able to buy a house get into a home, and those who could buy a modest house "upgrade" to something bigger.

What are interest only home loans?

Interest only home loans are what they sound like. You only make payments on the interest. Of course you’d never pay off a home this way. This is why the interest only period only lasts a few years (usually 5, 7 or 10). After that you start paying on the principal. But the idea is that with this sort of home mortgage the monthly payments are more affordable at the beginning. And buyers often feel that they will make enough in later years to cover the payments when they increase after the end of the interest only period. Unfortunately, while this works for some, we are now finding out, courtesy of the subprime lending crisis, just how many people such tactics do not work for.

Here are some of the downsides to leaping for the artificially low home mortgage payments associated with interest only home loans:

*Since you only pay the interest, you are not building equity in your home
*Interest payments increase if the interest rate rises (most interest only home loans are not 30-year fixed)
*You will remain in debt longer, since you will likely have to refinance for a longer term when it comes time to make payments on the principal
*Balloon payments at the end of the interest only period can be three or four times your interest only payment

With some careful thought, it is not too hard to see that the main advantage to getting interest only home loans — getting a bigger house sooner — is outweighed by the problems associated with this type of home mortgage.

Tags: home loans, personal finance, financial planning, finances,
interest only home loans, home mortgage