Interest Only Mortgages; Are They Right for You?

By: Mevish Jaffer

Interest Only Mortgages vs. Regular Mortgages

An interest only mortgage is a lot like it sounds; the payment that you, the borrower, must make initially involves the interest only. The interest only payment period usually lasts for about 5-10 years; however, you also have the choice to pay more than just the interest during that duration if you want to. The short-term advantage is that your monthly payments are lower during this time period because you are paying interest only. Regular mortgage loans on the other hand, involve paying part of principal amount each month, which in the long-run decrease the principal and interest amounts.

Interest Only Mortgages Are not Right for Everyone

Interest only mortgages are not suitable for everyone; in fact they tend to be most appropriate for only borrowers with a solid reason for a lower initial required payment. If you are in need of a larger residence but lack the upfront financing which is necessary, you may be the perfect candidate for an interest only mortgage. However, keep in mind that you must also know or at least have validated hope that your financial situation will improve before choosing an interest only mortgage as it could get you into trouble down the line when your interest only payment period expires and you are obligated to start paying off the principal amount.

Avoid Potential Interest Only Mortgage Related Pitfalls

While the thought of moving into a larger home by way of an interest only mortgage can be extremely tempting to you, it is vital to keep the bigger picture in regards to sufficient funds in mind. Don't only think about the instant gratification or immediate financial relief that an interest only mortgage can offer you, doing so could wind up landing you in a mountain of unwanted and unnecessary debt. The truth is that if you honestly have no prospect of a larger salary in the allotted interest only payment period, then an interest only mortgage loan is not the best solution for you. Most interest only mortgage lenders offer adjustable mortgage rates, which mean if interest rates rise in the future, you may end up paying more. For this particular reason, it would also be beneficial for you to make full payments as often as you can during your interest only time period in an effort to reduce the principal amount before your full payments are obligated to start being paid off.

Interest Only Mortgages Pros and Cons

Do the advantages of interest only mortgages outweigh the disadvantages? It's hard to answer this question on a general basis, as it will vary depending upon each individual's personal and financial situation. On the one hand, an interest only mortgage loan can allow you to purchase a more expensive home that would be otherwise impossible and it offers a significant interest only or "principal free" payment period which initially keep your monthly payments low. On the other hand, even if you have a promising career with a bright financial future, the job market is extremely fickle. It's also easy to get sucked into only paying the interest even when your finances allow you to make full payments every month. This makes it much harder on you when the principal amount kicks in. The only thing you can do is evaluate your financial needs and individual circumstances to the best of your ability and then determine whether or not an interest only mortgage loan would be your best option.