Interest Only Mortgages
An Interest Only Mortgage monthly payment does not include the repayment of principal for a determined period of time.
What is an Interest Only Mortgage?
- An Interest Only Mortgage is when the monthly payment does not include the repayment of principal for a certain period of time:
- Offered on fixed-rate or adjustable-rate mortgages including option ARMs (Adjustable Rate Mortgages).
- At the end of the interest-only period, the loan becomes fully amortized resulting in greatly increased monthly payments. The new payment will be greater than it would have been if it had been full amortizing from the start.
- Equity won’t build during the interest-only term. But, it could help close on a desired home instead of settling for an affordable home.
- Qualifying is based on the interest-only payment and will likely have the opportunity to refinance before the term expires. It’s a way to effectively lease a home now and invest the principal portion of the payment while considering the tax advantages and appreciation that accompany homeownership.
- Saves money in the short-run, but may actually cost more over the 30-year loan term.
- Borrower can pay interest-only during lean times and use bonuses or income spurts to pay down the principal.