With an interest-only mortgage, you have a fixed period of time in which you have the option of paying just the interest on the loan every month. Or, you can pay the interest plus as much principal as you would like above the minimum payment. If you decide to make the interest-only payments, your monthly payment will be lower than it would otherwise be with a payment that included interest and principal. For this reason, interest-only loans may be an attractive option when you are looking to refinance your home.
However, it is important to keep in mind that eventually, your principal will become due and the loan payments will increase. Once your interest-only period ends, your monthly payments will reset to a more standard payment that includes interest and principal. The period of time a loan is interest-only varies, but some available terms are 3, 5, 7 or 10 years. The loan itself can be either a fixed rate or adjustable rate mortgage with a term of 30 years. Interest-only is an option on a loan that affects a certain period of repayment obligations. It does not affect the interest rate, or whether that rate is adjustable or fixed.
When is An Interest-Only Loan A Good Idea?
If you are looking for an option that gives you flexible payments for a certain period of time, refinancing your home with an interest-only loan might be a good alternative for you. With more control over your cash flow every month, you can put use that money for a high-yield investment, pay down debt, or use it for college tuition.
An interest-only loan may also be a good option for people who intend to sell their home in a short amount of time. Even in a traditional mortgage, your payments are likely to be mostly interest for the early years of the loan. If you prefer to have a flexible monthly payment and are not concerned about the possibility of your payments going up precipitously later on, an interest-only loan might be a good idea. Keep in mind, however, that if you are not making payments against the principal on the house, your equity at resale will only be the amount of appreciation on the property.