Posted 4 years, 3 months ago

Interest only loans allow for you to make payments that cover only the monthly interest charge.  You may pay more than the interest, but you are not required to.  Interest only loans are popular for a variety of reasons, but mostly because they reduce your required monthly payment and allow for greater flexibility overall.

It’s important to note that the payment on an interest only loan is just that; interest only.  The principal balance will remain the same if you choose to only make the interest only payment.  For example, the interest only payment on a $300,000 loan with a rate of 4.0% is $1,000.00.  If you made the interest only payment for the first ten years of the loan, the balance would still be $300,000 at the end of the tenth year.  In contrast, the fully amortized principal and interest payment for a fixed 30-year loan of $300,000 at 4.0% would be $1,432.  This payment covers both principal and interest and would pay off the loan over the 30 year loan term.  The principal balance at the end of the tenth year on the fully amortized loan would be $236,351.

Another important point to consider with interest only loans is that the option to pay interest only lasts for a specified period, usually 5 to 10 years.  The monthly payment will likely increase when the interest only option expires.

Is an Interest Only Mortgage Suitable for Me?

Interest only mortgages are typically best for borrowers who can benefit from a lower introductory payment and who are not concerned with a higher payment in the future.  Here are some possible reasons:

  • Buy More House: The reduced payment made possible with an interest only loan can often-times allow for a borrower to purchase a more expensive home than they might purchase with a standard principal and interest loan.
  • Pay Principal When Convenient: Borrowers with fluctuating incomes may value the flexibility the interest only mortgage gives them.  When their finances are tight, they can make the interest only payment, and when they are flush they can make a substantial payment to principal.
  • Invest the Cash Flow: For many homeowners, paying down mortgage debt is the preferred way to build wealth.  Nonetheless, some may build wealth more rapidly by investing excess cash flow rather than paying down their mortgage.  For this to succeed, their return on investment must exceed the mortgage interest rate, since that rate is what they earn when they repay their mortgage.

These are just a few reasons that might lead a borrower to choose an interest only loan.  We understand that every borrower is unique and, while the interest only loans are a favorite among many borrowers, it might not be the right choice for you.  Please feel free to contact us to learn more about interest only loans and other available options.

Sincerely,

-The Kavanewsky Team