Interest Only Mortgage Loan Information
Interest only mortgage loans usually have an interest only period of 5 to 10 years. During this time period the borrower only has to pay the interest on the loan. After the initial interest only time period the remaining balance is amortized for the remaining term of the loan. For example if the initial loan was a 30 year interest only loan with a 10 year term of interest only payments the remaining balance would be amortized over 20 years.
An interest only loan allows for lower payments at the front part of the loan, freeing up cash for other purposes. Many times borrowers take out this type of loan because they are expecting a raise in the near future and will be able to afford higher payment later.
The pros of interest only home mortgage loans:
- Lower monthly payments during the interest only period
- Free up cash to save for retirement
- Still get the benefit of tax savings
The cons of interest only home mortgage loans:
- Risk of declining value of real estate and being upside down at the end of the interest only period
- Higher payments after the interest only period
- Little or no equity in your home during the initial interest only period
- Higher interest rates because they are riskier loans for the lender
If used properly you can find some advantages in interest only loans; however with the poor money management skills of most Americans it’s not the best idea. If you are planning on using an interest only loan to purchase a home you can’t really afford now, it’s not a good idea. Even though you may expect more income later in life it’s not a guarantee. Research and plan very carefully before taking out an interest only loan.