INTEREST ONLY MORTGAGES

A mortgage is called “Interest Only” when its monthly payment does not include the repayment of principal for a certain period of time.  At the end of the interest only period, the loan becomes fully amortized, thus resulting in greatly increased monthly payments. The new payment will be larger than it would have been if it had been fully amortizing from the beginning. The longer the interest only period, the larger the new payment will be when the interest only period ends.

You won't build equity during the interest-only term, but it could help you close on the home you want instead of settling for the home you can afford.

Since you'll be qualified based on the interest-only payment and will likely refinance before the interest-only term expires anyway, it could be a way to effectively lease your dream home now and invest the principal portion of your payment elsewhere while realizing the tax advantages and appreciation that accompany homeownership.

As an example, if you borrow $500,000 at 8 percent, using a 30-year fixed-rate mortgage, your monthly payment would be $3,668.82. On the other hand, on an Interest Only 40-year mortgage with a 10-year interest only payment plan, your monthly payment would be $3,333.33. This saves you $335.49 per month or $4,025.88 year. However, when you complete your 10^th year of interest only payments, your monthly payments will jump to the remaining 30 yrs of that amortization schedule which is $3,668.82, or $335.49 more per month. Hopefully, your income will have jumped accordingly to support the higher payments or you have executed upon your exit strategy whether it’s a refinance or sale of the property by that time.

Borrowers with sporadic incomes can benefit from interest-only mortgages. This is particularly the case if the mortgage is one that permits the borrower to pay more than interest-only. In this case, the borrower can pay interest-only during lean times and use bonuses or income spurts to pay down the principal.