Under an interest-only mortgage, the borrower is only required to pay interest on the mortgage for a specified period of time, often in the first five to ten years of the loan’s repayment tenure. However, factors become more costly after the interest-only period expires because the principal begins to amortize. The overall monthly payments on the loan increase significantly because you are now paying both principal and interest over a shorter period.
Interest-only loans are a type of nonconforming mortgage, which indicates they are difficult to come by and considerably more difficult to obtain. In terms of interest-only mortgages, there are two types to choose from: adjustable-rate and fixed-rate. Fixed-rate interest-only arrangements are extremely rare these days. Usually, interest-only mortgages are included as part of an adjustable-rate structure.
BENEFITS OF INTEREST-ONLY MORTGAGES:
- LOWER INITIAL MONTHLY PAYMENTS – Because you’re just making payments toward interest for the first several years on the repayment period, your monthly costs are generally more affordable than they would be with several other types of loans.
- POTENTIAL INCREASE IN EXCESS CASH – Lower Monthly payments can save up to a couple of hundred dollars in your budget each month.
- LOWER INTEREST RATES – As an adjustable-rate mortgage, this form of loan is typically more affordable than a fixed-rate mortgage because the interest rate can be reduced.
- FASTER PAYOFF OF LOAN – If you’re making additional payments toward an interest-only mortgage, the smaller principal can result in a lower monthly payment because the loan is no longer amortizing. Additional payments can be made to reduce the principal with a conventional loan, but the monthly payments stay the same.
- FLEXIBLE PAYMENT ARRANGEMENTS – The majority of interest-only loans do not prohibit you from making additional payments to reduce your principal balance. This is something you can do whenever you choose, and it will typically result in cheaper monthly interest payments. When your income fluctuates, such as when you earn more some months and fewer others, this can also benefit your budgeting initiatives.
- ALLOWS YOU TO ACQUIRE A PRICIER RESIDENCE: Because the interest-only payments are lower during the introductory period, you may be able to borrow a more significant sum of money that you can use to purchase a larger and pricier property.
Finding Your Lender
The pros and cons of an interest-only mortgage are two sides of the same coin. If you’re interested in a reduced monthly cost or a short-term place of residence, this may be the best option for you to consider. Take into account that payments for your principal will be required at some point in the future. We encourage you to get in touch to determine if an interest-only mortgage is a good fit for you. Our team of well-skilled professionals can help you decide which is the best possible option for you to consider.
Advantages of Interest-only Mortgage Loans
- Low repayments during the interest-only term
- Gives you access to larger loan amounts and better home purchases
- Gives you the option to pay for the equity once you’re financially ready