Is the Interest Only Mortgage Right for You

The interest only mortgage has been around for a long time. Its popularity fluctuates as do the backgrounds of the people who become involved with them. For those consumers who hate to spend money on interest charges and fees, this is not the type of mortgage product that they should look for when purchasing a home. Additionally, anyone who is not expecting to increase his or her level of income dramatically should consider a more traditional type of mortgage.

However, for those potential buyers who aren't quite earning the income that they hope to realize in the future, this could be the right type of mortgage. For example, someone who is just starting out in their career and is currently at the bottom of the pay scale could reasonably expect to increase their earnings over the years. Additionally, someone who is purchasing a home with a single income, but who has firm plans to become married and have access to a second income in the future might also want to access this type of mortgage.

An interest only mortgage typically includes two separate terms. During the first term, the borrower makes payments that go toward the interest on the mortgage only. Since the monthly mortgage payments only include the interest due, the payments are incredibly smaller than they would be with a traditional mortgage.

The premise behind this strategy is that an interest only mortgage allows borrowers to take on a larger mortgage than they would otherwise be able to afford. The ultimate goal is that the borrower will increase their level of earnings consistently and substantially so that they can afford the higher payments when the time comes for them to kick in during the second half of the interest only mortgage.

During the second term, the borrower makes payments that go toward the principal and interest on the mortgage. These monthly payments are by necessity higher than the initial payments simply because they now include both the principal and the interest. Ideally, the borrower would now be earning a greater level of income and would be able to afford the new payments readily.

By: Susan M. Keenan