Interest Only Mortage

A mortgage is "interest only" if the scheduled monthly mortgage payment - the payment the borrower is required to make --consists of interest only. The option to pay interest only lasts for a specified period, usually 5 to 10 years. Borrowers have the right to pay more than interest if they want to.

If the borrower exercises the interest-only option every month during the interest-only period, the payment will not include any repayment of principal. The result is that the loan balance will remain unchanged.

For example, if a 30-year loan of $100,000 at 6.25% is interest only, the required payment is $520.83. In contrast, borrowers who have the same mortgage but without an IO option, would have to pay $615.72. This is the "fully amortizing payment" - the payment that would pay off the loan over the term if the rate stayed the same. The difference in payment of $94.88 is "principal", which go to reduce the balance.

Homeowner Profile

A current or future homeowner who is suited for an interest-only mortgage is either a person who would like to free up income to invest in other areas, or is interested in purchasing a house that is has a higher value he or she can afford with traditional payments.

Advantages

.:	Build wealth more rapidly by investing excess cash flow rather than paying down the mortgage
.:	An interest-only is the instrument of choice in a quick turnover situation if you are trying to maximize the amount of house you can buy, and are limited by your income.
.:	On most interest-only loans, whether fixed or adjustable rate, the monthly mortgage payment will decline in the month following an extra payment.

Disadvantages

.:	Lenders usually charge a higher rate for an identical loan with an interest-only option
.:	You can purchase a home that is more than you can afford.
.:	You are not paying towards your principle .

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Interest Only Mortage

Homeowner Profile

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Disadvantages

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