Interest Only Mortgage

Posted In: Mortgage Basics

In recent years interest only mortgages have become hugely popular across America. With property values increasingly dramatically in many cities, interest only mortgages have allowed many people to realize the American dream of homeownership.

How they Work

When you obtain a conventional amortized mortgage, part of your monthly mortgage payment goes to paying down the principal. But with an interest only mortgage you're not obligated to pay down the principal during the first term of the mortgage. You will have to pay interest and other attendant fees, such as mortgage insurance, homeowner's fees, inspection costs, and the like, but the principal balance will stay the same.

The first term of the interest only mortgage varies depending on your type of mortgage. But typically it will last for five or ten years. Once that term has expired the principal will be amortized for the remaining length of the mortgage.

Advantages and Risks

Interest only mortgages can be a great tool, especially for younger homebuyers. For many people their peak earning years are in their forties or fifties. So purchasing one's dream home via an interest only mortgage can enable younger homeowners to establish themselves fiscally and professionally. In the intervening time the homeowner can often use their mortgage interest payments as a tax deduction. And with the housing market's steady long-term climb the homeowner also has the benefit of accruing equity on their property.

The risks associated with interest only mortgages are almost exclusively tied to short-term economic fluctuations, particularly changes in the housing market. Without careful financial budgeting interest only mortgages can increase the chances of financial stress or foreclosure. But maintaining a healthy saving account or a diverse investment portfolio, and living within one's means, can significantly reduce these risks.

Obtaining an Interest Only Mortgage

For help with finding great loan offers for an interest-only mortgage, you can turn to America's Lending Partners. ALP is not a lending institution, but can connect homebuyers with a vetted network of interested and legitimate lenders. If you need guidance choosing the right mortgage you should also consider consulting with a Mortgage Planner, who can prepare a custom mortgage plan for you and guide you step-by-step through the mortgage application process.