(877) 743-1100

Interest Only Mortgages

Interest-Only Mortgage: A mortgage where monthly payments do not include principal repayment for a set period. These loans are available as fixed-rate, adjustable-rate, or option ARMs.

Key Features:

  • Interest-Only Period: During this period, you only pay the interest on the loan, not the principal.
  • Post Interest-Only Period: After this period, the loan becomes fully amortized, leading to higher monthly payments. The longer the interest-only period, the larger the subsequent payments.
  • Equity Building: No equity is built during the interest-only term, but it can help you purchase a more desirable home.
  • Qualification: You qualify based on the lower, interest-only payments, often with plans to refinance before the interest-only period ends.
  • Savings Example:
    • $250,000 Loan at 6%:
      • 30-Year Fixed-Rate: $1,499 per month.
      • 5-Year Interest-Only: $1,250 per month initially, then $1,611 after five years.
    • Short-Term Savings: $249 per month, or $2,987 annually, but higher payments later.

Benefits:

  • Short-Term Savings: Can save money in the short run, which can be invested elsewhere.
  • Flexibility for Sporadic Incomes: Beneficial for borrowers with irregular incomes who can pay more during good times and interest-only during lean periods.

Considerations:

  • Long-Term Cost: These mortgages may cost more over the full term of the loan.
  • Higher Future Payments: Be prepared for significantly higher payments after the interest-only period.
  • Financial Planning: Ensure your income can support higher future payments or plan to refinance.

Interest-only mortgages offer unique advantages but also come with risks. Carefully weigh these factors and consult with a mortgage professional to determine if this option fits your financial situation.