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, yet largely misunderstood, home loan option that offer low initial payments over a fixed term. At the end of this term, payments can increase substantially, and the borrower then begins paying the interest and repaying the principal amount borrowed. Mortgage advice specialists may recommend this type of loan to people who don't 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 five and ten years. Payments on an interest-only loan are lower than those of a conventional home loan because you're 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 the choice between paying off your interest-only loan in a short period of time, refinancing or risking foreclosure.

Who benefits most from an interest-only loan? The short answer is individuals whose income is 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 interest-only mortgages. 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 financial stability. Others choose interest-only mortgages to refinance payments on an expensive home or cope with a temporary loss of income.

Tax Advantages of an Interest-Only Loan

There can also be tax advantages to interest-only mortgages. Since the initial payments on an interest-only loan are comprised entirely of interest and don't include principal, you may be able to deduct 100 percent of your payments at tax time. Be sure to consult your financial advisor before making any major decision.

Mortgage help 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. When the fixed term expires, however, be prepared to handle the financial burden of an expensive home loan. Careful planning and fiscal discipline are the keys to successful borrowing.

Although monthly payments are low for interest-only mortgages, your payments won't reduce the principal of your loan, and you'll eventually need to come up with the money to pay off your mortgage entirely. To explore your personal loan options and get mortgage advice, apply at HomeLoanCenter.com today.