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Definition of an Interest Only Mortgage

Apr 3, 2008
The interest only mortgage is a relatively new term, and not many home buyers are aware of its existence. An interest only mortgage is the only type of mortgage loan that has regular monthly payments that are only applied towards interest on the loan, and not the principal for the first years of the term of the loan. The advantage of an interest only mortgage is that your monthly payments start out considerably smaller compared to a conventional mortgage during the interest only portion of the loan. If you are wondering if an interest only mortgage is right for you, then just keep reading.

What Kind of Payment Will I Face?

Many first time home buyers struggle during the first year of ownership because they are not accustomed to paying a mortgage, which is generally higher than rentals. The monthly payments are typically much lower than a normal mortgage, allowing the extra funds to be used elsewhere. This is a great loan for home owners working a job paying commission only, or are facing a lower income for a time. An interest only mortgage does not require that the home owner pay an interest-only payment. What it does do is give the borrower the option to pay a lower payment during the early years of the loan. By exercising the option that month to pay a lower payment, that option can help to balance the home owner's budget. The buyer's income will probably increase over time, making it possible to afford the higher payments that will come when the principal is finally added to the payments. An easy way to figure out your monthly payment with the interest only mortgage is to take the amount of the (loan * interest rate/12).

What About the Principal?

After the term of period of interest only payments is complete, which is usually five to ten years, the payment increases to include repayment of both interest and principal. To combat a huge payment jump, many homeowners will often pay interest only payments during slim months and pay extra toward the principal when bonuses or commissions are received. Another feature that may be available with your interest only mortgage is that whenever you make an extra payment in order to reduce your principal, your next month's payment may be less.

The interest only mortgage is not usually suggested to people who have a regular source of income and who get medium sized home loans. Getting an interest only mortgage is an easy way to avoid having to change lifestyle habits during the first few years of owning a home, and having a mortgage is incredibly affordable this way.
About the Author
Get more great finance and investing tips at Jeffry Evans' personal finance blog. What is an Interest Only Mortgage? is just one of many great articles you will find at Personal Finance Resources.
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