Interest-Only Mortgage Summary
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Should I Consider an Interest-Only Mortgage?
An interest-only mortgage loan can be a major money saving product or a loan that could generate financial problems in the future. Much depends on the type of person you are when it comes to money management and general finances. You should also carefully consider the terms available to you.
Here are some reasons to consider an interest-only (IO) mortgage loan:
- You can pay principal when it is financially convenient for you. The lender is not looking for a normal principal and interest payment, so you can choose how much to pay each month.
- You can buy a bigger, more expensive home. If you locate the right IO product, you can qualify for a higher mortgage and, therefore, a higher priced home.
- You can invest your excess cash. If you can earn more by investing the monthly cash you'll save and get a larger return than the tax benefit of paying down principal, an IO might make sense for you.
- If you're in a rapidly appreciating real estate market and you might turn over this property fairly quickly, you could enjoy rapid profit (as a capital gain, not regular income) upon the sale of the house.
The downside factors of an interest-only mortgage loan:
- Contrary to some public opinion, an IO loan may not be less expensive than a normal mortgage loan. Those that start less than market often have escalation language that will schedule an interest rate higher than market in the future.
- An Adjustable Rate Mortgage (ARM) that starts at a low interest rate may escalate quickly to market or above-market interest rates.
- If you don't have the financial discipline to pay an amount to principal on a regular basis, you may be very disappointed at your profit and/or equity position when you sell this property.
Should you consider an interest-only mortgage? Sure. Should you become overly enamored by the lower monthly payment at the beginning? Absolutely not. Think carefully and honestly about the benefits to you personally and financially of using an IO mortgage to finance your next real estate purchase.