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Home Mortgage Interest Only

An interest only mortgage is a mortgage in which you only have to pay the amount of mortgage interest as a monthly payment.

The way this mortgage works is quite simple, the home owner is only required to pay the interest. Once the interest has been paid the homeowner decides how much of the principal they want to pay if any.

The advantage to this mortgage is that the homeowner can defer the payment of the principal and only pay the interest if they have to. This is sometimes called the IOU option because the homeowner only has to pay the principal when they can.

How it Works

In a regular mortgage you have to pay the interest and a tiny portion of the principal each month. In an interest only mortgage only the interest payment is required. This can reduce the monthly mortgage payment by about a third.

Advantages to Interest Only Mortgages 

The big advantage to an interest only mortgage is that it usually translates to a lower monthly payment for homeowners. The other advantage is flexibility: the homeowner can pay off the principal or balance of the mortgage when they want to.

This means that a homeowner could take the money used on the principal and put it in savings or money market and draw interest on it. Then when they have the principal saved up they could pay off the balance all at once and have some interest income as well.

An interest only mortgage could of advantage to those of limited income and small business owners who may need extra cash. It could also be use to those who are retired or planning to move in the near future.

Some people use interest only mortgages because they enable them to finance a larger or more expensive home. Since only interest is being charged the homebuyer can purchase more house with these mortgages.

Disadvantages to Interest Only Mortgages

Many lenders will charge a higher interest rate with an interest only mortgage and give a homeowner stricter terms.
The length of the life of interest only mortgages can be restricted to 10 or 15 years. This means that it is usually impossible to get a traditional twenty or thirty year mortgage as an interest only mortgage.

Interest only mortgages are often adjustable rate mortgages or ARMS which have serious drawbacks. In an ARM the mortgage holder can raise the interest rate during the life of the mortgage. This means that the interest rate and the amount of mortgage payments could go up at any time.

Interest only mortgages aren’t for everybody because of the potential disadvantages. Only those who are sure that they can pay off the principal should take out such a mortgage.