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Interest Only Mortgage Loans
An interest only mortgage loan is most popular with homeowners who have homes that are rapidly appreciating in value and who want the lowest payment possible. Qualified borrowers make interest-only payments with the choice to make higher payments in order to reduce the principal. There are a variety of options, including making interest-only payments during the first 3, 5, or 7 years of these mortgages.
For most homeowners, paying down mortgage debt is the most effective 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.
Why choose an Interest-Only Loan?
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An attraction of an interest only mortgage loan for many people is the lower
payment. Especially for homeowners in expensive housing markets, the lower
payment increases their home purchasing power.
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In some housing markets where home appreciation is great it may not be
desirable to the homeowner to reduce principal. The added levels of
appreciation will be sufficient to build enough equity for their next
refinance.
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A big advantage with an interest only mortgage payment is flexibility. Any
amount added to the interest-only payment gets directly applied to principal,
allowing the homeowner more control. This approach requires discipline but is
an attractive option for some homeowners.
- Also, the entire payment qualifies as tax-deductible interest during the interest only period.
