Pros and Cons of an Interest-Only Mortgage

by Greg Cryns

            An interest-only mortgage is similar to a balloon mortgage in that it allows the borrower to make small monthly payments and then pay more at a later date.  For 5-10 years, the borrower pays nothing but the interest on the loan, so payments are kept very low. At the end of the loan terms, the interest-only perk goes away, and the 

loan balance is the same as when you initially got the loan.  You haven’t been paying on the principle during that time, so it’s almost like spinning your wheels.

            This benefits the lender because they make pure profits on the interest-only loan for the length of time you’re not paying on the principle.  But it can also be a boon to borrowers who need the time to become financially stable.

            During an interest-only loan, you do have the right to pay more on the loan if you want to, so that your principle does decline during the course of the loan, but it won’t be required.

            If you were to take out an interest-only 30-year loan for $150,000 at a 7% interest rate, then your monthly payments would be $875. If you had a traditional loan, your monthly payments would be $997.95.

            When is an interest-only mortgage right for you?  If you’re self-employed and your income is up and down, then an interest-only loan can help you stave off the financial insecurity.

            If you’re currently dealing with a lot of other debt, then an interest-only loan buys you time to pay off the debt and get back on your feet before you begin having to make full mortgage payments that include the principle.

            If you know you can pay a little extra toward the principle, but aren’t 100% sure of just how much you’ll be able to fork over, then you might succeed with an interest-only mortgage.

            Some investors take the money that would have been spent on paying the principle and invest it in lucrative opportunities, giving them more of a return on their money than the equity they would have built in their house during that time.

            Since your monthly payments will be lower, you might be able to get a larger loan, because your income will handle the interest-only payment in the beginning.  This is perfect if you want to buy a larger house and expect your income to rise over the course of the loan.

Greg Cryns is the owner of Flat Fee Real Estate Guide - http://www.flatfeerealestateguide.com