Is an interest-only mortgage loan for you? While the low monthly payments are enticing, they simply may not be beneficial to some. Before diving in to an interest-only loan, assess your lifestyle and read through all the details of the mortgage.
Understanding interest-only loans
Interest-only loans are fairly straightforward. Monthly payments, usually in the first years of the mortgage, only require that you pay the interest portion of the payment. Interest-only mortgages are for set periods, often around five to seven years, and allow you to use the extra savings in principal payments for other things. The interest-only portion is only an option; you can still pay off the principal while in an interest-only mortgage. When the term of the interest-only period ends, the original mortgage agreement moves back in to play.
When you should
An interest-only loan for a mortgage can be very beneficial to some. If you’re just entering a potentially lucrative field, such as medicine or law, and believe you’ll net a higher income in the coming years, an interest-only mortgage will allow you to save during those initial years.
Business owners may benefit from these types of loans due to their fluctuating incomes. Interest-only loans allow you to maximize cash flow at all times, a benefit that many business owners require.
Executives with income based on bonuses and commissions benefit as well. When bonus time comes around, you can pay off the principal in a lump sum.
You may also profit from an interest-only loan if you have the discipline and financial savvy to invest the extra savings. Get advice and calculations on interest-only loans with Bankrate’s interest-only payment calculator.
When you should not
You might not want to take out an interest-only loan if you’re looking to buy a home and take out a large mortgage when you only earn a regular wage. Payments often jump tremendously after the initial interest-only period is over, and you may not be able to afford them. Find a home that you can afford and that fits with your budget. Bankrate’s mortgage loan calculator can help you figure out an amortization schedule.