The Pros and Cons of an Interest Only Mortgage

By Karen Lawson
Loan Page Columnist

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An interest only mortgage loan, if used wisely, can assist you in achieving financial goals such as saving for retirement or college tuition. Although it may seem the most obvious reason to get an interest only mortgage is for lower payments, this is not necessarily true. With mortgage interest rates increasing, how do interest only loans benefit homebuyers? The answer depends on your financial goals and circumstances.


Interest Only Loans Provide Cash Flow

Much has been made of the importance of fully funding employer provided savings plans such as the 401(k). If you're behind the curve in saving for retirement, or want to save for future expenses such as college tuition, you can invest what you would be paying in principal in long-term savings. The catch is that you must have the self-discipline to save, rather than spend, the difference between a fully amortized mortgage payment and an interest only payment.

Irregular Income? Reduce Monthly Mortgage Expenses

If you own a business or your income is largely generated by commissions, bonuses, or other infrequent payments, an interest only loan can help you reduce ongoing monthly expenses by the amount of the principal portion of the monthly payment had your loan been fully amortized.

Things to Think About

Interest only loans are structured so that they will fully amortize after an initial period of interest only payments. Unless you refinance, you will have to plan for making increased payments when the interest only portion of your mortgage term expires. Also, you will not be building home equity as fast as you would with a fully amortized loan. If you anticipate a significant increase in income or assets, an interest only mortgage can assist you in buying a larger home now.

Looking at your present financial situation and anticipating future needs can help you decide if an interest only mortgage is right for you.

About the Author
Karen Lawson is a freelance writer with more than fifteen years of experience in mortgage banking. She earned an MA degree in English from the University of Nevada, Reno.

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