Pros and Cons of Interest Only Mortgages

Interest Only Mortgages

This article will explain how interest only mortgages work and the pros and cons of them. While interest only mortgages have a bad reputation due to the media, they can be useful for some people if they understand the risks that come along with it.

The term interest only mortgage is a bit of a misnomer. The loan is usually interest only for the first part of the mortgage – the first 5 years of a 30 year mortgage for example. During this time the home owner only has to pay the interest on the loan each month. After 5 years the home owner will start making regular mortgage payments. These payments will be slightly higher because they include payments to interest as well as principle.

Pros of interest only mortgages:

· Lower payments at the beginning of the loan allow those people who are just starting out a way to more easily afford the home they want.

· The option to make interest only payments or pay on principle as well. This is often overlooked; interest only loans offer the option to pay only interest. A home owner can choose to pay down some of the principle as well.

Cons of interest only mortgages:

· Higher interest rates. For the luxury of being able to only pay interest for a period of time, the mortgage lender will usually charge a higher interest rate on the loan. The increase can vary from lender to lender, but is generally around 0.5%.

· No equity. If a home owner decides to pay just the interest each month, they will not build up any equity in their home.

Interest only mortgages are usually utilized by first time home buyers who are just starting their career. The option of paying interest only for the first few years allows them to deal with unexpected expenses. The thinking is that by the time they have to make full mortgage payments each month their salary will have increased enough that they can afford it.

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