Understanding Interest Only Mortgages

In recent years, the home loan market has undergone a dramatic transformation, with new mortgage products available as never before. Interest only mortgages are a popular but largely misunderstood home loan option that offer low initial payments over a fixed term. At the end of the term, payments can increase substantially, as the borrower then begins paying the interest and repaying the principal amount borrowed. This type of mortgage works best for borrowers who do not need to increase the equity (amount of money invested) in their homes, beyond their down payment.

Typically, interest only mortgages are fixed for a specific term between 5 and 10 years. Payments are lower than those of a conventional home loan, because you are paying only the interest charges. When this fixed term expires, your payments are reformulated based on interest plus principal, which usually translates into much higher payments. You are now faced with paying off your mortgage in a short period of time, refinancing your loan, or risking foreclosure.

Who benefits most from interest only mortgages? The short answer would be individuals whose income is derived mostly from commissions or bonuses, or borrowers who are looking forward to a financial windfall in the future (and we’re not talking about winning the lottery!).

Similarly, borrowers who actively invest the savings from their interest only mortgages can be good candidates for this type of loan. In the short term, they can borrow more and pay less. Some choose to invest these savings toward educational expenses, growing a business, or increasing their financial stability. Others choose interest only mortgages to refinance payments on an expensive home or to cope with a temporary loss of income.

There can also be tax advantages to this type of loan. Since the initial payments on interest only mortgages are comprised entirely of interest and do not include principal, you may be able to deduct 100% of your payments at tax time. Be sure to consult your financial advisor before making any major decision.

Experts caution borrowers to weigh the pros and cons of interest only mortgages carefully. Sure, you can purchase a little more “house” because your monthly payments are unconventionally low. But when the fixed term expires, you must be prepared to handle the financial burden of an expensive home loan. Careful planning and fiscal discipline are the keys to successful borrowing.

While monthly payments are low for interest only mortgages, the downside is that your payments do not reduce the principal of your loan and you must eventually come up with the money to pay off your mortgage entirely. To explore your personal loan options, apply at HomeLoanCenter.com today.

Need lower monthly payments?  Extra cash?  A fixed mortgage rate?  Refinance now! Home Loan Center can help!