Interest Only Mortgages

"Interest Only mortgage" in which the monthly payment does not go toward paying off the principal for a certain amount of time. On both fixed-rate and adjustable-rate mortgages and option ARMs, interest-only mortgage loans are available. At the end of the interest-only period, the loan is fully amortized, which means that the monthly payments will be much higher. The new payment will be bigger than it would have been if it had been fully amortized from the start. The bigger the new payment will be when the interest-only period is over, the longer the interest-only period was.

During the interest-only term, you won't build equity, but it could help you buy the house you want instead of the one you can afford. Since you'll be qualified based on the interest-only payment and will probably refinance before the interest-only term ends anyway, it could be a way to lease your dream home now and invest the principal part of your payment elsewhere while still getting the tax benefits and appreciation that come with being a homeowner. For example, if you borrow $250,000 at a fixed rate of 6% for 30 years, your monthly payment will be $1,499.

On the other hand, if you borrowed $250,000 at 6% and used a 30-year mortgage with a 5-year interest-only payment plan, your first monthly payment would be $1,250. You save $249 a month, or $2,987 a year, because of this. When you get to year six, however, your monthly payments will go up to $1,611, which is $361 more each month. By then, either your income will have gone up enough to cover the higher payments or you will have refinanced your loan. Mortgages that allow you to pay only the interest may save you money in the short term, but they end up costing more over the 30-year loan term. But most people pay off their mortgages well before the full 30-year loan term is up. Interest-only mortgages can help borrowers whose incomes come and go. This is especially true if the mortgage allows the borrower to pay more than just the interest. In this case, the borrower can pay only the interest when money is tight and use bonuses or sudden increases in income to pay off the principal.