Advantages of an Interest Only Mortgage

What is an interest only mortgage loan ?

An interest only mortgage loan is a loan in which the monthly payment only includes the interest, and not the principle, on the borrowed amount.  The interest only payments are only an option for a short period of time, usually ranging from five to ten years.  At the end of this period, even though the borrower has been making monthly payments, their loan balance will not have decreased at all.  They basically have a balloon payment to make once the interest free period is over. A balloon mortgage is a mortgage, which leaves a balance at the end of the maturity period.

This payment is referred to as the balloon payment because of its large size.
Interest only loans are not for everybody, but in some cases, they may be a borrowers best option.  If the borrower is expecting an increase in income sometime in the near future, having an interest only loan would be advantageous.  They would benefit from having a lower monthly payment in the first few years while they still have a lower income.  An interest only loan may also be beneficial to someone who needs as much extra money as they can get. 

For example, if someone has taken out a second mortgage at a higher interest rate, they would be able to use the money the save from having an interest only payment to pay down the other loan.  People who are looking to make a quick gain in capital also find this type of loan very attractive.  If a buyer knows that a property’s value is going to appreciate rapidly within the next few years, they could buy the house using an interest only loan.  The buyer would be able to make low monthly payments and then sell the property before they would have to pay the higher payments.  In this case, the buyer would stand to make a large profit by using an interest only loan.

Although there are many cases where an interest only mortgage loan would benefit a home buyer, there are points that one must consider.  First, many people choose an interest only loan because they are tight on cash.  However, counting on an increase in income is very risky.  Unless it is guaranteed, it would not be a good idea to take out a loan based on what you expect your income to be in a few years.  If things change, you would have still have to pay back the loan with the same amount of income.

If you are thinking about buying property with an interest only mortgage, you must consider the risks.  If, for you, the benefits outweigh the risks, or you know that you will be able to continue to make payments of a higher amount, then interest only mortgages do have many advantages.  The only way to be completely prepared is to discuss all of your options with your lender.  By using a mortgage calculator, you can decide whether or not you would be able to afford your payment if you found yourself in the worst-case scenario. If you can, an interest only mortgage may be right for you, but if you do not think you can, you should consider other options.