Should I Consider an Interest Only Home Loan?

By Kelly Richardson
LoanPage.com Columnist

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As the real estate market begins a period of recession, mortgage lenders are creating new lending products that will entice borrowers. The interest only home loan is a unique financial arrangement that may hold a variety of key benefits for you. Knowing the good and the bad will help you to decide.

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One of the first concepts that you need to understand about interest only home loans is that it is not a mortgage in and of itself. Interest only is an option that can be attached to any mortgage deal as the borrower allows. Another common misconception is that the interest only mortgage option is a smart move for everyone. As with any financial option, the interest only loan should be considered carefully before entering in to any type of agreement. Here are the situations where an interest only home loan will be most appropriate.

Ideal Interest Only Situations

  • » Infrequent Income. If you have a commission-based income, or an income that frequently rises and falls from month to month, the interest only mortgage option will allow you to keep your payments low.
  • » Income Increase. Another situation that might call for an interest only home loan is if you anticipate making an increase in your income in the coming months.
  • » Real Estate Investors. Investment players who will put the monthly savings into a reliable deal can benefit from the lower payments of an interest only situation.
If you are considering entering into an interest only arrangement, it's helpful to know the options that you have available to you. Interest only products change frequently, but these are the major types.

The Interest Only Mortgage Summary

For the first 10 years of most interest only loans, you can pay the interest on the principle and then increase your payment as time progresses. There is no penalty for paying more of the principle.

One of the best parts of an interest only loan is that many times you can borrow up to 25% more than you would should you go for a fixed or adjustable-rate home loan. You can also qualify for tax-deductible benefits, as well.

Be sure to discuss the interest only mortgage option with your lender. They will be able to provide you with specific financial information on the types of programs that have available for you.

About the Author
Kelly Richardson covers the real estate scene in major cities across the country. His articles appear in educational journals, periodicals, and e-zines.

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