Interest-Only Mortgages Explained

Interest-only mortgages allow you to keep your monthly mortgage payments low and still be able to build good equity in your home. This can be an excellent option for people who are budget-oriented or who are looking to increase their income in the future. Keep reading to learn more about how interest-only mortgages work and whether they’re suitable for you.

An interest-only mortgage is a type of home loan where the borrower only pays the interest on the loan. After the loan period ends, the borrower will also start paying the principal alongside the interest. Therefore, this type of loan is good at the start and bad at the end since you end up paying more to it than a regular mortgage loan.

Interest-only mortgages can be a good option for borrowers who want to keep their monthly payments low or expect their income to increase significantly soon. Additionally, it can be a suitable choice for those looking to sell the house on short notice.

However, interest-only mortgages can be risky. If the property doesn’t gain in value, as the homebuyer would expect, they can end up losing funds in the equity. And that’s not something anyone wants.

What Exactly Is An Interest-Only Mortgage?

An interest-only mortgage is a type of loan where you only pay the interest for a certain period of time. You must also start paying the loan’s principal when it’s finished.

There are a couple of things to keep in mind with an interest-only mortgage.

• First, since you are not paying the loan’s principal during the interest-only period, in the end, you will owe more money than if you paid both simultaneously.

• Second, your monthly payments will increase once the interest-only period ends.

If you’re considering taking out an interest-only mortgage, educate yourself on the implications they could have for your finances.

How Do Interest-Only Mortgages Work?

When you take out a mortgage, you usually pay back the entire loan amount plus interest during the loan time. With this type of loan, you only pay back the interest for a certain period. After that, you must start paying off the principal as well.

Interest-Only Mortgages: Pros and Cons

There are some pros and cons to consider with an interest-only mortgage. Some homebuyers see this as a good option. With this loan, you only have to pay the interest each month and you don’t have to worry about making the principal payment for the time being. Your monthly payments are lower, and you can save more money on your home budget. 

On the bad side, you’ll have to pay more interest over the life of the loan than you would initially pay with a typical mortgage loan.

Before you decide whether an interest-only mortgage is right for you, we advise you to talk to a financial advisor and understand the risks and rewards of this type of loan and know if this is a suitable option for you.

Pros

The biggest pro of the interest-only mortgage is that your monthly payment for the first few years (usually 5-10) is lower since you’re repaying only the interest, not the entire borrowed amount. The principal comes to pay later, which gives you some financial relief.

Cons

Since you’re repaying only the interest for the first few years, the principal or the initial debt stays the same. At the same time, if your propriety loses value, your equity also goes lower.

When Do Interest-Only Mortgages Make Sense?

An interest-only mortgage can be a good choice for some homebuyers. For instance, this loan type makes sense if:

• You expect your income to increase in the following years
• You plan to sell your home before the end of the interest-only period
• You invest in a property that will generate rental income
• You have a large amount of cash available

Are Interest-Only Mortgages a Good Option?

If you’re considering an interest-only mortgage, it’s crucial to understand how they work and whether or not they’re a good fit for you. There are pros and cons to taking out an interest-only mortgage. As aforementioned, yes, you will pay the lower amount at the start, but you will end up paying more since the real hassle will start after the loan period ends.

Bottom Line

You should think about whether or not this loan type suits you. It all depends on your plans. If you want to buy a home, renovate, and sell before the loan term ends. This might be your chance.

If you expect to increase your income, go for it. Yet, if you’re unsure about your future financial situation and there is uncertainty regarding your paychecks, we advise you to think twice. In the end, sometimes, it’s better to make payments regularly and pay off the entire loan within the specified period than to put yourself in place to borrow money from friends and family just to pay off the loan. 

The bottom line is that there are definitely some perks with the interest-only mortgage, but if these perks are less than downsides, you should not go for it. Wait until you can take a regular mortgage and enjoy yourself doing well.