Assessing Interest Only Mortgages Pros and Cons

One of the trends in mortgage loans in recent years has been a push for so-called interest only loans. The interest only mortgage pros and cons can be spelled out fairly simply to help borrowers understand if this option is a good one. Each buyer is different, and while an interest only loan mortgage makes sense for certain borrowers, others will opt to stay away from this choice. It is important for the borrower to keep her or his long-term financial goals in mind before making a decision.

First, the advantage of an interest only mortgage is that the borrower will have lower monthly payments, at least at the beginning of the loan. The borrower will pay only the interest on the loan instead of paying an interest plus principle. In the early stages of a mortgage loan, the borrower typically pays more than 90 percent of the payment toward interest, but even at this rate, the borrower can save $100 or more during this early time.

The downside of getting an interest only loan, though, is that the principal continues to sit unpaid. Eventually the borrower must pay off the entire mortgage, and an interest only mortgage only prolongs the inevitable. In addition, the interest is calculated monthly and is based on the principal. If the borrower never repays any principal, he or she will always owe the same amount in interest and will not make progress on the loan.

The advantage of an interest only mortgage comes out when the borrower fits certain criteria. First, if a borrower expects a major positive change in his or her financial outlook within a few years, an interest only mortgage may be a viable choice. People finishing medical or law school may be good candidates as their long-term earning potential grows quickly once they have completed their education.

People with a good plan to invest – and the willpower to carry out the plan – also may want to explore the interest only mortgage loan option. These people should plan to invest the difference between their monthly payment on the interest only loan and the payment that would have with a normal, or amortizing, mortgage. Then, the borrower can pay off a lump sum of the principal when the interest only payments end, usually after a set amount of time.

The interest only loans pros and cons, then, make the choice worth considering in certain situations. It is not a good idea to get these loans if there is no projection of a long-term change in financial situation or if there is no plan to pay off the principal. Under the right circumstances, though, these loans make it possible for the up and coming to get into their dream homes sooner.