Interest Only Mortgage Home Loan

The early 2000’s saw the advent and promotion of some atypical home loan products, not the least of which is the interest only mortgage.  An interest only mortgage can be extremely beneficial and highly appropriate for some borrowers, yet disastrous for others.

An interest only mortgage is one whereby the borrower only pays the interest due on the principal balance which remains unchanged.  At the end of the interest only period the borrower may enter another interest only mortgage, pay the principal, refinance, or possibly convert the loan to a principal and interest payment (fully amortized loan).

Some interest only mortgages last for a period of 5 or 10 years, when they become fully amortized.  Interest only loans typically carry a slightly higher interest rate than a fully amortized loan as the lender is taking a higher risk due to the borrower not paying down the principal balance.

The major advantage of an interest only loan is their lower payment structure due to only paying the interest due on the loan and not the principal balance.  This allows the borrower to buy a more expensive home or have a lower mortgage payment.  The major disadvantage of an interest only home loan is the borrower doesn’t pay down any principal balance over the interest only term of the loan.

Interest only home loans may be appropriate in some circumstances, but especially so when the borrower has a high expectancy of a larger income in the future as well as substantial appreciation of the property.