Interest Only Mortgage Can It Save Me Money ?

Interest-only mortgages can be a double-edged sword, offering some advantages but also carrying notable risks.

Advantages and Uses

Interest-only mortgages typically have lower monthly payments in the initial period, as you only pay the interest on the loan. This can be beneficial for individuals who plan to stay in their home for a short period or those who are buying in rapidly appreciating markets. For example, if you take out an interest-only mortgage for five years, you will only make interest payments during that period. This can be advantageous if you plan to move or refinance before the interest-only period ends.

These loans are available in both fixed-rate and adjustable-rate varieties, though adjustable-rate options are more common. The adjustable rate is linked to an index rate, which fluctuates, so your interest rate and payments can change over time. After the interest-only period ends, you will need to start paying both interest and principal, which can significantly increase your monthly payments.

Risks and Considerations

The main risk with interest-only mortgages is the balloon payment at the end of the term, where you must pay the entire principal balance in one lump sum. If housing prices drop or if you face financial difficulties, you may end up owing more than the property's value, making it challenging to refinance or sell the home.

Interest-only mortgages are often used to afford more expensive homes and potentially earn appreciation, but they can lead to negative financial outcomes if property values decline. Additionally, these loans are generally subject to higher interest rates due to the increased risk for lenders.

Payment Options and Terms

Interest-only mortgages can have payment options ranging from one year to ten years. For example, a $250,000 loan with an interest-only option might have the following payments:

- Minimum Amount Due: $804

- Interest Only Mortgage: $989

- 30-Year Payment: $1304

- 15-Year Payment: $1482

These payments show the significant difference between making only interest payments versus paying both principal and interest.

Best Suited For

Interest-only mortgages might be ideal for individuals who are focused on managing their finances carefully, wish to lower their monthly payments, and do not plan to stay in their homes long-term. However, it is crucial to understand the potential for rising payments if interest rates increase and to evaluate whether this type of loan aligns with your long-term financial goals.

In summary, while interest-only mortgages can offer short-term savings and flexibility, they come with risks and potential for increased future payments. It’s important to fully understand these factors and how they align with your financial situation before committing to this type of loan.