Interest Only Mortgage….Is it Right For You?
You’ve heard it can save you $100s per month in your payment…but you wonder, what are the facts…and would an initial interest only payment work for you?
With an interest-only mortgage loan, you pay only the interest on your mortgage in monthly payments for a fixed term. Usually the term is 5, 7, or 10 years. At the end of that term, you’d either refinance, pay the balance in a lump sum, or start paying off the principal, in which case of course the payments would increase. You won’t build equity in your home loan during the interest only term, unless you make principal payments; But in a strong market your home’s value can be expected to increase.
If there was a ‘perfect’ fit for an interest only mortgage it would be the borrower whose regular monthly income is moderate and largely based on bonuses, that are earned and paid periodically throughout the year. That way, bonuses could be used in part to pay down principal when they were earned, and the monthly payment would remain smaller during the other months in the year.
Other homebuyers can also benefit from an interest only mortgage;
- As stated, someone whose income is based on bonuses or commissions earned periodically;
- Someone that reasonably expects their income to increase dramatically within the next few years, like a professional that has just entered the work force after graduation;
- Someone who can invest the amount of principal usually paid on the mortgage into something that will work to generate more income, for example children’s college education or other long term investment;
- Someone that is purchasing a home well below market, needs the extra funds to improve the home and plans to sell the home again within 3-5 years, with a significant gain, in a strong market;
- Business owners that could benefit by maximizing their cash flow for their seasonal business.
Some homebuyers that may NOT benefit from an interest only mortgage;
- Someone who earns a regular hourly wage or fixed salary;
- Someone who is purchasing a home in a soft or declining market;
- Someone who is close to retirement, or are in an earnings decline due to job cutbacks;
- Someone who is just considering this type of mortgage to buy ‘more home’ now and doesn’t have a specific expectation of higher earnings or planned investment for the principal they are saving;
- Someone that is purchasing a home below $150,000.
How much can you save by obtaining an Interest only mortgage? Here are some examples;
Still have questions? Don’t worry, we can help you figure it out…Just contact us anytime for a free analysis of your unique home financing options. Sherry.Carney@guarantytrust.com