Are Interest Only Mortgages Right for You?

Interest rate only mortgages can save you a lot of money, but they are not right for everyone. Here is a list of types of homebuyers who will benefit the most from interest rate only mortgages.

Fluctuating Income

If your income is not consistent, interest rate only mortgages can give you the flexibility to make interest-only payments when your finances are tight. When you make more money, you also have the option of making a substantial payment toward the principal. This way, your mortgage is flexible enough to accommodate your vacillating income.

Buy More House

Interest rate only mortgages can enable you to buy more house than you could otherwise afford. If you expect your income to increase within the next few years, you might use interest rate only mortgages to buy a bigger, better house than you otherwise would. Ideally, your increased income will coincide with when the interest-only term expires on your mortgage and your payments increase. One thing to remember when considering interest rate only mortgages for this purpose is that the possibility exists that a higher income will never materialize.

Investments

For some homebuyers, building equity in a home is also a good way to build wealth. However, for those buyers who are investment-savvy, you may be able to make more money more quickly by investing your extra cash flow instead of paying down your mortgage. To use interest rate only mortgages for this purpose, your return on your investments must exceed your mortgage interest rate because that is the rate you earn when you repay your loan. Similarly, to use interest rate only mortgages for investment purposes, you must be certain you will actually invest the excess cash instead of spending it.

Payments Reduce in Response to Principal Reduction

With most interest rate only mortgages, your monthly payment will decrease for the month after you made an extra payment (more than just the interest). Interest rate only mortgages are the only type of mortgages that offer this feature. The payments on fixed-rate mortgages have the same payment for the life of the loan, and the payments on adjustable-rate mortgages do not change until the rate resets. Many borrowers find this immediate payment adjustment in response to extra payments very convenient. Not all interest rate only mortgages offer this feature, so ask your lender if you would like a loan with this option.

Capital Gains

Interest rate only mortgages are the loans of choice for those trying to maximize the amount of house they can buy but are limited by their income. If you are buying in a market with strong price appreciation and are looking for quick capital gains, you may consider interest rate only mortgages. However, if you have sufficient income to qualify for other types of mortgages, you might apply for those loans instead. If you have any questions that have not been answered so far, hopefully it can be found in our frequently asked questions section.