You might have heard of interest-only mortgages especially in today’s real estate market, but what is it exactly? As the name suggests, an interest-only mortgage is a type of mortgage in which the borrower is required to pay only the interest on the loan for an agreed upon period. Interest-only payments do not go towards any of the principal.
Interest-only payments, like other payment options, come with their own set of advantages and disadvantages. For example your financial situation changes and you need more cash flow. We’ll outline more pros and cons in the next section.
Lower monthly payments: Since you’re only paying the interest portion, your monthly payments come down, allowing you to invest your money in other areas.
Income increase: Say you have a lot of expenses at the moment, and you might be paying for tuition. You know down the road that your income will increase and right now you can not afford a full mortgage.
Bigger property: With an interest-only mortgage, you might be able to afford a bigger house, but you must be prepared for your payments to increase drastically when the interest-only period ends. While risky, if you know that there’s a large sum of money coming your way down the road, this can work for you.
Property value decrease: If the value of your property decreases, you may end up owing more than the property is worth, putting more financial stress on you than anticipated. Additionally, when the interest-only period ends, you start paying both the principal and interest amounts.
Higher interest rates: Interest-only loans charge higher interest rates. Your monthly payments will be quite low, but the principal portion still needs to be paid off later down the road.