Pros and Cons of Interest Only Mortgage Loans

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The pros and cons of interest only mortgage loans are critical to explore before investing in this particular type of loan. For some people, this type of loan is the ideal option but for others it can be a costly mistake. Consider the pros and cons carefully before choosing this option.

Pros of Interest Only Home Loans

The following are some of the advantages of interest only mortgages. However, the loan terms and the conditions for the loan you are considering may differ.

  • The home has a more affordable monthly payment than a traditional conventional mortgage loan. You pay less each month because you do not pay interest during the initial interest-only period.
  • Some loans do provide for a lower initial monthly payment that increases over time. Because the interest is lower initially, your monthly payment may be lower at the start of this interest-only period than at the end of it.
  • You can spend the funds you save during the initial period the way you want to, rather than paying towards the home.
  • In some circumstances, you may be able to reduce your costs if you plan to live in the home for a limited amount of time. You must be confident, though, that the home's value will not depreciate in that time.
  • This also allows you to pay more towards the loan when you can afford to do so and less when you cannot.

Consider each of these advantages as they relate to your situation. In some cases, for example, the lender may not allow principal payments during this initial period, though this is rare.

Cons of Interest Only Mortgages

Interest only mortgages do have negative aspects to them. Like all mortgage loans, compare all of your options carefully.

  • In some circumstances, borrowers are no better off than if they rented for that initial interest-only period. You have not built equity in the property.
  • You will have to make higher monthly payments later on, after the initial period. This can be expensive and out of reach for some.
  • If house values fall, you could become upside down on the loan, meaning you will owe more than the property is worth.

The disadvantages can put some people in a financially bad situation. Contrast these negative aspects to the positive potential returns.

Compare All Loan Types

While it is important to consider the benefits of interest-only mortgages, remember to also consider other types of loans. Conventional and FHA loans may offer an affordable option. Consider interest rates and your credit score, too, to know how much this type of loan will cost you.

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Pros and Cons of Interest Only Mortgage Loans