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Interest Only Mortgage

Interest Only Home Loans are designed so borrowers pay only the interest owed on the loan each month. This option lasts for a fixed term between 5 to 10 years. Each monthly payment only goes toward the interest, therefore the loan balance does not decrease unless the borrower makes additional payments toward the principal loan amount.

During this time frame, the borrower has the right to pay more than the interest payment; however, if the borrower chooses not to pay toward the principal loan amount then the loan balance remains the same.

Interest Only Benefits

  • Lower monthly mortgage payment

  • Additional cash available to pay toward higher-interest debts

  • Greater control over cash flow

  • The entire monthly payment during the interest-only period usually qualifies as tax-deductible.  

  • Helps to keep costs low so that funds are available to be leveraged in other areas in the case of short-term investment properties such as fixer-uppers.

 

Interest Only Requirements

Interest only loans involve an increased risk for lenders, therefore the requirements are different than for traditional loans.

  • Ability to verify source and level of infrequent income

  • Ability to afford higher payments when the rate changes

  • Higher down payment

  • Lower debt-to-income ratio

 

Interest only loans are beneficial if one of the following guidelines applies to the borrower’s situation:

  • The borrower expects to sell or refinance the property prior to the interest-only period ends.

  • The borrower’s income relies heavily on bonuses or commission checks that come infrequently during the year; therefore the person will want the flexibility of making interest-only payments during the times when their income is low and then paying more when their income increases.

  • The borrower expects to earn significantly more income in the next few years.

 

Interest Only Loan Options

Some of the loan types that offer an interest-only option include:

  • Adjustable Rate Mortgages

  • Fixed Rate Mortgages