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Interest-only mortgages work similarly to adjustable-rate mortgages (ARMs). In a nutshell, interest-only mortgages are when you only pay the interest on the mortgage for the first couple of years of the loan and not any of the principal payments.
Once the interest-only period ends then you'll pay the entire mortgage which includes both the interest and the principal. Sounds great right?! Here are some pros and cons to keep in mind should you choose an interest-only mortgage
Pros
- Like an ARM, the initial monthly payments are typically lower which
- can help you pay off the loan faster if you pay more than the minimum each month.
- You may be able to purchase a home that's a little higher in price. Psst... if you ultimately can't afford the home, don't move forward with the loan!
- You might receive a lower interest rate.
Cons
- Your initial low monthly payments won't be forever.
- You're not building equity into your home if you're only making interest-only payments. Equity will start once you start paying towards that principal balance.
- It's possible to lose equity in your home if the value declines.
Who is this ideal for? This loan may be best suited for borrowers looking to keep costs low. Like ARMs, interest-only mortgages may be good for borrowers who aren't looking to stay in the home long.
