An interest-only mortgage is a mortgage where in the first years of the loan you pay the interest and not the principal. Your monthly payments start out small because they do not include the repayment of principal for a certain period of time.
These loans are typically suited to two types of buyers: Those who are disciplined enough to make regular principal payments during the interest-only period (to pay it off quicker). And those who plan to only own their property for five to 10 years.
At the end of the interest-only period, you have three options: refinance, pay off the loan, or make monthly payments of both principal and interest.
Refinance: If you refinance your home before the interest-only term expires, you are effectively leasing your dream home now and investing the principal portion of your payment elsewhere while realizing the tax advantages and appreciation that accompany homeownership.
Pay off the loan: Paying off your loan early has many benefits including saving potentially thousands of dollars on interest, freeing up cash flow to put toward other things, and having peace of mind knowing you own the home outright.
Monthly payments of both principal and interest: Continuing your monthly payments, your new payment will be much larger. The longer the interest-only period, the larger the new payment will be when the interest-only period ends.
Pro: Borrowers with sporadic incomes can benefit from interest-only mortgages. This is particularly the case if the mortgage is one that permits the borrower to pay more than interest-only. In this case, the borrower can pay interest-only during lean times and use bonuses or income spurts to pay down the principal.
Con: There is potential of losing the equity in your home that was furnished by your down payment if the market values go down. This could also kill your chance of refinancing.
Carefully consider the pros and cons of an interest-only mortgage before diving in. Our knowledgeable loan officers will help you determine if it is right for you! We can answer all your questions and guide you through the process. Contact our mortgage experts to get started today!