Should You Get an Interest-Only Mortgage Loan?

There are many types of mortgages out there for homebuyers to choose from. Some of them are better than others and there are some that are just a complete disaster from the beginning. Unfortunately, because some buyers do not educate themselves on the types of mortgages or because they have bad credit, they take a less than desirable mortgage and often get into more trouble than they were already in.

An interest-only mortgage is one of those types of mortgages that may sound like a good idea for buyers with bad credit and little money, but there are some disadvantages to these types of mortgages, too. Interest-only mortgages are typically set for a term of either five or ten years or somewhere in between. The name says it all – you are only making payments on the interest charges of the mortgage loan. Once this term expires, the lender recalculates your payments which includes any interest that has not been paid along with the principal. This almost always results in much higher mortgage payments that many buyers cannot afford. As a result, the buyer is either forced to find a way to make those larger payments, refinance the loan or give in to foreclosure.

If a borrower is disciplined with their money, an interest-only mortgage loan may be ideal for them. If they choose to invest the money they are saving each month while only paying on the interest, they can get that extra money to work for them earning a high interest rate. In a nutshell, these borrowers can borrow more money in the short term and pay less while investing their savings for other reasons, whether it is to grow their business, finish college with a higher degree or simply to let it sit in an interest-bearing account. When the mortgage is recalculated after the interest-only term is up, the borrower may have more money than they would have if they had just made the normal mortgage payments.

Interest-only mortgage loans may also benefit some buyers with tax advantages. The money you pay on the interest of your mortgage loan is usually tax deductible, which means that the borrower may be able to deduct 100 percent of their payments on their taxes during the term of the interest-only loan. It is always best to consult with a qualified financial consultant, however, before doing this on your own.

Before signing up for an interest-only loan, weight the advantages and disadvantages. You may be a financial guru and think about the tax benefits of these types of loans, but is it worth the risk? Are you even disciplined enough to put the extra savings toward something useful or in an interest-bearing account or would you be more likely to spend it each month? Weigh the options and be realistic about your financial discipline before agreeing to an interest-only mortgage loan.