If the monthly payment you can get with a fixed-rate home loan isn’t as low as you’d like, an interest-only mortgage loan may seem enticing. Not having to pay down the principal during the first several years lowers your payment amount, leaving you with more cash flow.
That said, interest-only loans aren’t right for everyone. To figure out if this type of mortgage is worth your consideration, take a look at the following.
How Interest-Only Mortgage Loans Work
With a conventional mortgage loan, you make monthly payments that are part principal and part interest. The principal goes toward the amount you borrowed, while the interest goes to your mortgage lender in exchange for loaning you the money you need to buy a house.
If you take out an interest-only home loan, your entire monthly payment during the initial period – which is typically three, five, seven or ten years – goes toward interest. Once the period ends, you’ll start paying principal. And, you can expect your payment amount to get quite a bit bigger.
When an Interest-Only Loan Makes Sense
The lower initial monthly mortgage payment is what makes this type of mortgage loan appealing, and for certain homebuyers, it can be a smart financing option. In order for that to be the case, however, at least one of the following should apply to your situation:
- You have a steady cash flow and expect to be in a comfortable financial position when the principal payment kicks in
- You’re making a down payment of at least 20 percent to avoid private mortgage insurance and start with sizeable equity in the home
- You will put the money you’re saving by not paying principal toward investments that offer a higher rate of return
- You plan to sell the property before the initial period ends and the monthly home loan payment rises
Potential Drawbacks to Interest-Only Loans
As you likely already know, life doesn’t always go according to plan. Some homebuyers who opt for this type of mortgage come to regret the decision – and if you have a good memory, you might recall that these loans played a large role in the housing market crash back in 2008. The risks of going with an interest-only loan include:
- Job loss or other factors could dramatically change your financial situation
- Not paying principal means not building equity, which could be a problem if the market drops
- Refinancing after the initial home loan period ends may not be possible
- You could end up having to sell your house at a loss
How to Find an Interest-Only Mortgage Loan
After the 2008 housing market crash, many lenders stopped offering this type of mortgage loan. Since this isn’t a widely available form of home financing, the best way to find a lender is through an experienced mortgage broker.
A mortgage broker with a good network can shop around for lenders and compare home loan offers, providing you with a solution that meets your needs. In northern Utah, the professional team at Intercap Lending is ready to help – for more information on interest-only mortgage loans and your other home financing options, contact us today.