Low Payment Interest Only Mortgage Loans

An interest-only mortgage is a type of home loan that enables the borrower to makin payments solely towards the interest for the initial years of the mortgage, unlike payments that include both principal and interest.

Interest-only loan payments can be designated for a defined timeframe, offered as an option, or extend throughout the entire loan term, requiring repayment of the entire amount at the end.

Does an Interest Only Mortgage Offer a Lower Monthly Payment?

Typically, interest-only loans are configured as a specific subtype of adjustable-rate mortgage (ARM). Although interest-only mortgages result in lower payments temporarily, they also mean no accumulation of equity and entail a substantial increase in payments when the interest-only period concludes.

Many new home buyers have benefitted from the low monthly payment derived from an interest only mortgage. Let our lenders help you compare low interest loans online for home buying or refinancing.

What Is An Interest-Only Mortgage?

Interest only loans provide an alternative to traditional mortgages with fixed interest rates, offering borrowers added flexibility when financing a new property. These loans can be combined with traditional mortgage options and are typically structured similarly to Adjustable-Rate mortgages, where monthly payments adjust after a specified period. This can be especially advantageous for borrowers planning to sell an investment property within a few years or for those anticipating an increase in their income in the near future.

An interest-only mortgage involves paying only interest on your home loan every month for a limited time, such as five or 10 years. The reason some homeowners like these loans is that the initial payments are less because principal is not being paid.

The biggest pro of an interest-only mortgage is the low initial monthly payment. There are reasons that you could want a lower payment in the first few years. Perhaps your salary is lower right now but you expect more money to come in in a few years.

Also, some people who want to buy a house in a time of high real estate prices may find that they can more easily afford the payment by making interest-only payments.

Another reason to consider the interest-only option is if you are sure you will sell the home after a few years. For instance, if you are in the military and know you will move three years, interest only can be a smart choice. You can save money by paying interest only and do other things with it, such as build your savings or investing it.

Pros and Cons of an Interest Only Mortgage

Many homeowners have felt the pinch of rising costs and inflations in 2024. Some may consider obtaining an interest-only mortgage to keep costs down. Before applying for an interest-only mortgage, it is important to consider the pros and cons of these loan products. If you are ready to apply for a mortgage, speak to one of our dedicated loan experts today.

Cons To An Interest-Only Mortgage

While there are benefits to an interest-only mortgage, there are things to be aware of before signing on the dotted line. First, remember that the loan usually has a higher interest rate than a regular mortgage. The lower monthly payment only comes from not paying principal in the first five or 10 years. The principal will have to be paid eventually.

Also, because the interest rate is higher, you will pay more interest over the years. There also is a chance that the mortgage rates could rise, as we have seen in the last two years. Generally, rate hikes on interest-only mortgages have a cap around 2%, but after the interest-only period is over, the increased payment could be a shock.

Another potential problem is if your home drops in value. Then, when you sell the home later, it may not cover what you owe. Being upside down on a mortgage is a problem that you want to avoid.

Think About Why You Want An Interest-Only Loan

When considering an interest-only loan, financial experts say it is important to understand why you want it. It is common for people who are on the bubble of being able to afford the house to want an interest-only loan so they can reduce the payment.

This is not a good reason to get an interest-only home loan. If you get into the home and can barely afford the interest-only payment, it’s likely you will have problems making the higher payment later.

A strong candidate for an interest-only mortgage has a good source of steady income with sufficient cash flow to pay the full mortgage payment after the interest-only period is over.

Mortgage rates could still go up, but you would have enough income to handle it. Plus, if you plan to sell the home after a few years, going interest-only may make sense.

Are Interest Only Loans Good for Buying a Second Home?

Interest only home loans offer many advantages for financially secure borrowers or homeowners looking to finance an investment property. For instance, if you plan to own the property for a limited period, an Interest only loan could work in your favor by offering lower monthly payments. At the end of the interest-only period, you have the option to refinance. Additionally, if the property’s value has appreciated, you could profit from reselling it.

Other Options than An Interest-Only Mortgage

An interest-only mortgage can be a smart choice for certain situations. But there are other options to consider. You could reduce your monthly costs by getting an adjustable-rate mortgage. This loan may have a lower, fixed rate for five or seven years, and will readjust to market rates later. But the payment on this loan includes principal, so you are paying down what you owe.

An interest-only mortgage can be a wise choice for certain consumers. If you are sure you will sell the home in a few years, or have plenty of steady income to afford the higher payment later, you could consider the interest-only option. But if you are getting the loan with interest only so you can just get into the home, this isn’t a good option. It is probably better to buy a less expensive home, or apply for an adjustable-rate mortgage.

Our loan experts can go over a variety of loan options with you, including fixed rate, adjustable rate, and interest-only loans. Please contact us today for all of your mortgage needs.

Many self employed borrowers like the interest only loan program because they afford the payments but prefer improved cash flow: If you can offset the additional interest from an interest-only mortgage through another investment, the flexibility of lower payments could help you grow your wealth.