Interest-Only Mortgages from an Investor's Perspective

Interest-only mortgages are commonly offered by a number of different financial institutions. To the borrower, they can present a nice alternative to the traditional 30-year fixed mortgage. However, these mortgages look different from the perspective of an investor. Here are a few things to consider about interest-only mortgages from the investor's perspective.

Higher Interest

One of the benefits that investors receive from this type of mortgage is the high interest rates that are commonly associated with interest-only loans. Consumers tend to expect a higher interest rate with these loans, and they are typically fine with it. Since they are making an interest payment only on a monthly basis, it does not seem as if they are spending that much money. The total payment is cheaper than what they can get from a 30-year fixed mortgage, and that is usually all they care about. As an investor, you can bring in a higher return on your investment with this type of mortgage than you can by investing in other mortgages.

Regular Payments

Another major benefit of this type of mortgage is that you can receive a regular interest payment on your investment. If you have the money to invest in mortgages, this presents you with a good option to invest in. Many investors choose to purchase corporate bonds and receive a regular interest payment over the life of the bond. Then, they receive their initial investment back at the end. This is basically the same scenario except you are dealing with an individual instead of a corporation. Therefore, this can provide you with a nice and regular source of income over the long-term.

Low Risk

Another benefit of using this type of mortgage is that you are at a relatively low risk of losing your entire investment. Sticking with the comparison to corporate bonds, if a company that issues a bond went out of business, you could potentially lose your entire investment. If the company does not have sufficient assets to pay all of the bondholders, you could be out of luck. However, with an interest-only mortgage, this is not the case. If the mortgage holder defaults on the loan, you will come into possession of the property that was securing the loan. Therefore, you can sell the house and recoup most of your costs. 

Foreclosure Process

Although you can typically get back your investment when a mortgage holder goes through foreclosure, it can still be a difficult process for the investor. Most of the time, the foreclosure process can take several months to complete. Then, you have to worry about putting the house on the market and finding a buyer that is willing to pay full price for it. It could take months or years to get your initial investment back. In the meantime, you will lose out on the regular interest payments that you are planning on receiving.