Interest Only Overview
With an interest only home loan, you can pay only the interest owed on your loan each month when you make a mortgage payment. The option to only make interest payments lasts for a fixed term, usually between 5 to 10 years. Since each monthly payment only goes toward the interest, your loan balance does not decrease unless you make additional payments toward the principal loan amount. During this time frame, you have the right to pay more than the interest payment if you want. However, if you opt not to pay toward the principal loan amount then the loan balance remains the same.
Interest Only Benefits
Many borrowers find several advantages with an interest only mortgage including:
Lower monthly mortgage payment
Additional cash available to pay toward higher-interest debts
More control over cash flow
The entire monthly payment during the interest only period usually qualifies as tax-deductible. Be sure to consult your tax adviser.
If it’s a short-term investment property such as a fixer upper, interest only payments help keep costs low so your money is available to be leveraged in other areas.
Interest Only Requirements
Since interest only loans involve increased risk for lenders, the requirements for these loans are somewhat different than a traditional loan.
Ability to verify source and level of infrequent income
Ability to afford higher payments when the rate changes
Higher down payment
Lower debt-to-income ratio
Generally, interest only loans are beneficial if one of the following guidelines applies to your situation:
You expect to sell your home or refinance it prior to the interest only period ending.
Your income heavily relies on bonuses or commission checks that come infrequently during the year; so you want the flexibility of making interest only payments during the times when your income is low and then paying more when your income increases.
You’re looking for a first time mortgage and you expect to earn significantly more income in the next few years.
Interest Only Loan Options
Some of the loan types that offer an interest only option include:
Adjustable Rate Mortgage
To determine which loan type is right for your financial situation, it’s important to discuss your options with a certified loan specialist.