Interest Only Mortgages

How does an interest only loan work and why would I want a loan that I only pay the interest on and never pay down the balance? These are common questions asked about interest only loans everyday. An interest only loan is simply another option for consumers when they are dealing with a mortgage. There are fixed rate loans, adjustable rate loans, 30 year mortgages, 40 year mortgages, interest only home loans, etc... Interest only loans provide for a lot more flexibility each month in your monthly payment by requiring the borrower to only have to make the interest only portion of a mortgage payment instead of principal and interest. You are free to pay more than the interest only amount whenever you would like which will lower the principal balance of the loan and your home should always appreciate so you are still gaining equity in your home.

Interest-Only Mortgages are sometimes used by homebuyers to purchase a bigger home than they can otherwise afford. Because Interest Only home loans have monthly payments lower than that of fully amortized mortgages, homebuyers can acquire a mortgage with a higher loan amount.

An interst only payment may be a good option for those who are seasonally employed, self employed, or in commission based positions because it gives you the option to pay less when money is tight, and pay more when you have the ability to comfortably do so.

Interst only loans are also attractive to investors. The payment flexibility allows an owner to pay less if their property is not producing income.

However, on small loan amounts, an interest only payment may not be that much lower than a fully amortizing loan payment. Ask your loan officer to help you compare the two.

All interest only loans are interest only for a fixed period of time. (Generally 1-10 years, depending on the program) Make sure that the interest only option you are receiving will match your needs regarding how long you need the lower payment.

Interest-only loans also have some drawbacks. One pitfall is that attractive starting rates of interest-only loans may lure consumers into loans that they cannot afford long-term. For instance, once the "interest-only" part of the loan expires, say in five or 10 years, your mortgage payments can shoot up significantly, hundreds or even thousands of dollars more each month. Also, before the interest-only period expires, rates can increase, which will cause the monthly payment to increase.

Interest only mortgages can be very beneficial to the financially disciplined homeowner. Provided the homeowner can invest the equivalent of the principal payment that would be made on a fully amortizing loan and earn a return in excess of the after tax cost of interest the homeowner will come out ahead.