Interest Only Mortgage: Pros And Cons of Interest Only Home Loans

What is an Interest Only Mortgage?
An Interest Only Mortgage is one of several financing options available to people seeking home loans. In this type of Mortgage Loan, as the label denotes, rather than paying both the Principal and the Interest on the loan every month, you can make monthly payments on only the interest. The initial monthly payments are low for the first five or ten years of the loan term, and then later, as the Premium will get amortized, the loan payments are significantly higher.

Pros of an Interest Only Mortgage
Going for an Interest Only Mortgage loan seems like an appealing financial option to many home buyers, especially if you are buying a house for the first time. Since the initial payments are low, it is easier to get approved for a home loan for one thing and for another, it makes it possible to go for a property that would otherwise seem unaffordable.

Another favorable factor is that by paying only the Interest in the initial period, you are able to invest the Premium in businesses, savings, stocks, etc. If you invest wisely, it is possible that you will receive healthy dividends and, when the five or ten initial years of paying only Interest are over, you can either pay off the remaining home loan in a lump sum or you can go for a refinancing option.

Many people use the Premium amount to fund retirement plans, college education plans, business ventures, pay off credit card bills and so on. You may also use the Premium amount to pay off another, more pressing debt. This way you can ease your financial situation and free up your money to make only the higher payments on your home loan later.

If your home loan amount does not exceed the tax limitation for mortgage interest, you can be eligible for tax deduction. This is another plus factor.

An Interest Only Mortgage loan is also a good financing option for investors who are in the business of buying properties in order to renovate and resell. This can work out well and bring you high profit margins only if you manage to sell the house for a higher amount than you bought it for.

Cons of an Interest Only Mortgage
Interest Only Mortgages were very popular during the nineteen twenties. A large number of people went for this type of home loan. They were confident of meeting the higher payments later – they could always refinance and, the way the economy was booming, they expected to receive higher wages and expected the value of their property to appreciate in the coming years. In actuality, the exact opposite happened. With the Great Depression, markets crashed, property values dipped and people lost their jobs. It is important to take a lesson from this.

Before going for an Interest Only Mortgage, you should thoroughly evaluate your future ability to pay the higher payments at the end of the Interest Only period.

While it is great to look on the optimistic side, it is wise to think out beforehand all the pitfalls that might crop up as well. What will you do if your income does not increase as expected? Or if you lose your job? What if for some reason you have to sell your home before you've paid off the loan? That could mean financial loss for you. What if the property value depreciates instead of appreciating? Real Estate prices are notoriously unstable. What seems like a great investment right now could lose its value drastically a few years down the line due to rapid land development, type of neighborhood, natural disaster, and so on.

If your Interest Only Mortgage is an Adjustable Rate Mortgage, it can prove problematic for you if the market rate goes up after the Interest Only period is over. You could find yourself paying much higher monthly payments than you expected.

Many people are just not good at investing or rather lackadaisical about it. Unless you are willing to thoroughly educate yourself on all Investment and Savings related matters before you go for an Interest Only Mortgage, you might be better off going for some other financial plan for your home loan. An Interest Only Mortgage loan is really best suited to financial experts with sound investment abilities and large assets.