Interest Only Mortgage Loans

An interest only mortgage loan is one in which there is an interest only payment option that is offered for an adjustable rate mortgage, option adjustable rate mortgage, or a fixed rate mortgage.  This option allows you to pay only the interest portion of your monthly payment for a specific amount of time, such as three, five, seven, or ten years.  At the conclusion of that period of time, the loan becomes completely amortized, which results in mortgage payments that are much higher.  The new payment will be bigger than what it would have been had it been fully amortized from the start.  The longer the period in which interest only is paid, the larger the payment will be once the interest only payment time period is over.  This type of loan works well for a borrower who will be earning much more money in a few years but wants maximum buying power now. The disadvantage is that once you have completed paying your interest only payments, you have have not even put a slight scratch on your principal amount.  In fact, you haven't even touched the principal amount of your loan.  You still owe all of it.  The money you have been paying went right to the bank in the form of interest payments only. 

There are several advantages to interest only mortgage loans.  First, with an interest only mortgage loan, a buyer may be able to qualify for a larger amount for the loan and possibly a larger home.  Second, the payments during the interest only period will be as low as possible.  Third, you won't have to pay out cash to build equity during the interest only period.  Fourth, since the entire payment is interest only, it will fully qualify as tax-deductible interest during this period.  Fifth, you can make investments with the amount of money you hold in order to help build your net worth. 

Interest only payments are usually offered for adjustable rate mortgages.  The payments made during the beginning interest only period are based on the loan balance and interest rate and are applied to interest only.  After the initial interest only period has concluded, the loan will convert to a traditional ARM.  The monthly payments will be based on the interest rate, the loan balance, as well as the remaining loan term and will be applied to the principle and the interest.  The interest rate will be adjusted based on the index rate and margin. 

The bottom line is that not every mortgage is the right fit for every person.  It all depends on your personal current financial situation, your future expectations for income, and your financial goals.