Pros & Cons of Interest-Only Loans

by Marianne Salina
Loan Page Columnist

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Perhaps you have been in the market for just the right mortgage and you've heard those tempting words "interest-only loan." Often, lenders will encourage you to take an interest only mortgage, which means that the scheduled monthly payments consist only of interest. This type of mortgage is different from a fully amortizing loan, where your payments will cover both interest and principal. An interest-only mortgage is for a fixed term. After that term, you will have to start paying the principal and interest.


Is an Interest-Only Loan Right for You?

An interest-only mortgage is suitable for individuals with inconsistent bonuses or commissions or someone who expects to earn quite a bit more in future years. If you have an unpredictable income, this type of mortgage will allow you to maximize your cash flow as much as possible. Some pitfalls associated with interest-only loans include losing value on your home or if you lose your job, you will be stuck with a huge payment on your mortgage.

Refinancing with Interest-Only

Sometimes homeowners who choose a refinancing option for their existing mortgage will be presented with the interest-only loan approach, which brings their monthly payments down to just the interest payments. Interest-only mortgage loans are riskier, however, because unlike the fully amortizing loans, which, if paid consistently will eliminate the balance on your principal, interest-only leaves you with the same balance you began with. Interest-only or not, do your research first and then decide.


Who should and shouldn't get an interest-only mortgage, by Holden Lewis,,
Interest-Only Loans Not Ideal, by Jack Guttentag, Los Angeles Times, 15 September 2002

About the Author

Marianne Salina is a freelance writer and columnist in Spokane, Washington. She graduated with honors upon receiving her B.A. in Literature/Creative Writing from UC Santa Cruz. Her varied coursework in critical theory and Womens Studies is an undercurrent within her fiction, and her careful study of educational programs is reflected in her column.

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