For some prospective homeowners, an interest-only mortgage can be helpful when buying their home, especially if they require lower monthly payments. These mortgages have a lower monthly payment than traditional mortgages because they only require the borrower to pay the monthly interest on the mortgage instead of the interest plus principal. Interest-only payments generally stop after five to ten years, and then borrowers will start paying off the principal.
What type of borrower benefits from interest-only mortgages?
Interest-only mortgages can be beneficial for borrowers with fluctuating incomes who will be able to occasionally make higher monthly payments to start paying off the principal. The monthly payment will be lower if the borrower makes a higher payment on the principal the prior month. The lower monthly payment will only occur while fixed and adjustable rate mortgages are in the interest-only payment period. This feature of interest-only mortgages makes them very appealing to borrowers in need of flexible repayment options.
Interest-only mortgages can also help families buy a larger house but make smaller payments until their income rises over time.
Borrowers who are interested in investment opportunities outside of real estate can benefit from lower monthly payments, which will allow them to invest money that would otherwise be put towards a higher mortgage payment.
What are the cons of an interest-only mortgage?
The lower monthly payments can be helpful in the present, but borrowers assume some risk since their monthly payments will increase but not necessarily that their income will also increase. Borrowers who are investing the extra money available from lower monthly payments need to ensure that their return on investments is higher than the mortgage interest rate to justify making interest-only payments.