The beauty of borrowing money for a home is that you have plentiful options. There is no one right way to select and pay down a mortgage and you may be considering a lesser known option like an interest only mortgage loan. These loans are quite a bit different from their traditional counterparts, so understanding the nuances of each can help you choose the best home loan for financing the big purchase.
Traditional Mortgages
Traditional mortgages are generally home loans that lock in a fixed interest rate for a specified period of time, typically 15 to 30 years in length. If you agree to the terms of a traditional mortgage of any term length, your monthly payments will be applied to both the principal loan amount and interest. The ultimate goal of making your monthly payments is to reduce the principal amount initially borrowed while simultaneously contributing interest payments.
From the first mortgage payment of a traditional mortgage, borrowers make contributions to build equity in their home and pay down their loan balance, meaning the loan is amortized. By making all the required loan payments, your mortgage will be completely paid off by the end of the loan term.
Interest Only Mortgages
Interest only mortgages are home loans that allow the borrower to only repay the interest for a specified term of the loan agreement. Typically, mortgage holders pay only interest for five to ten years until the interest only period ends. At that point in time, the monthly payment amounts will be increased to reflect any interest changes in the initial loan contract as well as payments toward the principal balance of the loan.
During the interest only mortgage loan repayment period, homeowners are not making any contributions that result in home equity. That process happens when the interest only mortgage reverts to the original contracted terms.
These types of specialty mortgage loans are also called delayed amortization loans. That is because an interest only loan defers payments toward the principal balances to a later time. Only after the interest only portion of the mortgage loan matures will your monthly payment be applied directly to the initial loan balance.
