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The Pros & Cons of Interest Only Mortgages
by Gabriel Traverso
CMR Columnist
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What is an interest only mortgage? How does it differ from a standard mortgage agreement? Which one is best for me?
What is an Interest Only Mortgage?
Simply put, an interest only mortgage is a mortgage in which the borrowers monthly payment consists only of interest on the home loan. No portion of the payment is applied toward the principal. The option to pay only the interest lasts for a specified amount of time--usually between 5 and10 years. During this time, the borrower has the option of paying more than the interest on their mortgage by paying toward principal. After the initial period, many interest only mortgages convert to an adjustable rate mortgage (ARM), which means your interest rate can fluctuate with changes in the market.
Is an Interest Only Mortgage Right for Me?
If you are considering taking on an interest only mortgage, ask yourself the following questions. Do you have a valid use for the lower initial payment? Do you anticipate a raise or other funds coming in to allow you to pay down the principal later? Interest only mortgages are an excellent tool for homebuyers who have fluctuating income, such as commission checks or bonuses. If you have bad credit, however, taking an interest only mortgage requires careful consideration. You don't want to take a bad credit situation and make it worse by choosing the wrong home loan.
Mortgage Shopping: Weigh All the Factors
Today you have more options than you think when it comes to applying for a mortgage and the interest only mortgage is only one of those choices. Work with your mortgage broker to evaluate your financial situation, particularly over the next few years, and then look at your mortgage options. An interest only mortgage can be an excellent tool for many homebuyers, but not for everyone. The important thing is to find the home loan that's right for you!
About the Author
Gabriel Traverso is a freelance writer, professional musician, and artist. He resides with his family in Reno, NV.
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