Making Interest Only Loans Work For You

If you want to lower your mortgage payment, there is a good chance you will evaluate an Interest Only option on your mortgage loan. An Interest Only option might be a good fit for someone whose income is mostly in the form of infrequent commissions or bonuses or who expects to earn more money in a few years. Business owners with unpredictable incomes might benefit from interest only loans also.

The Interest Only option was originally designed for financially savvy borrowers who will truly invest the savings on the difference between an interest-only mortgage and an amortizing mortgage, and who are confident that the investments will make money. Financial advisers don't recommend interest-only mortgages to regular wage earners who take out moderate-size home loans and don't have a strategy for investing the savings.

With an interest-only mortgage loan, you pay only the interest on the mortgage in monthly payments for a fixed term. After the end of that term, usually ten years, you refinance, or pay the balance in a lump sum, or start paying off the principal, in which case the payments jump skyward.

Let's say you borrowed $250,000 at 6 percent. For the first three years, the savings on an interest-only loan would amount to less than $250 each month. Double the loan amount to $500,000 at 6 percent, and an interest-only loan saves more than $350 in the first month. In addition to the monthly savings, the lower monthly payment also allows borrowers to buy much more house.

The Interest Only option is a good option for individuals who have a future of increased earnings ahead of them who want to buy more house now. Without the interest only, the homeowners may find themselves with continuous “buying up” transactions where real estate and moving costs would otherwise chip away at home equity gains.

Among the risks of an Interest Only option is that the house will lose value or not appreciate as rapidly as the borrower believes. People must remember that the principal must be paid at some point and the Interest Only option will prohibit them from building equity in their home. However, during the past decade, most homeowners have built their equity through appreciation and not by paying down the mortgage.

Understanding that the Interest Only option is not for everyone, you can use this option on most loan programs to minimize your monthly payment, qualify for more home when buying, and gain some financial flexibility for your overall financial goals. For