What Is an Interest Only Mortgage Loan?

What is an interest-only mortgage loan? Is it right for you? Much has been written about some people’s assumptions and opinions about what interest-only mortgage really is. The media always seem to find a way to demonize it and make people view it in a negative perspective. Thus, it is important to make people understand the true nature of this mortgage loan option.

An interest-only loan is not really interest-only.

Aside from the media making people believe that interest-only loans are risky and unsafe, the name itself is misleading. There is no such thing as an interest-only mortgage. It simply doesn’t exist because in reality you will eventually pay the principal balance. A distinct characteristic of this mortgage loan options is its natural flexibility. When mortgagee can’t pay the monthly payment they need to, which is a sum of the interest and the monthly balance, this option allows them to pay only the interest as of the moment. However, this is just temporary. Some companies only allow mortgagees to pay interest-only during the first five years of the term. After five years, they are no longer allowed do this.

Who will benefit from this option?

This is advantageous for individuals and families who are first time home buyers. This buys them time to adjust at paying high amount of monthly bills even higher compared to payments for monthly house rentals. This method allows clients to pay lesser in the first few years of the term. Moreover, this is beneficial for individuals who earn income based on commissions instead of fixed monthly salaries. They can pay the interest, which is lesser, on months when they can’t pay them in full. And pay them in full when they have earned enough on the succeeding months. This flexibility allows people to buy time to find enough money to pay for their monthly billing on the coming months.

How much do they cost?

Because you can’t expect lenders to do things for free, interest-only loans cost a little bit more than traditional loans. For instance, a 30 year fixed rate loan is available with a 5 percent interest; an interest-only mortgage loan might cost a 1 percent more. However, this definitely outweighs the advantages that an interest-only mortgage loan option can offer you. Additionally, lenders differ greatly in the interest rates they offer. Therefore, it’s a good ideal to ask as much loan companies for better deals.