An interest-only loan is one that gives you the option of paying just the interest or the interest and as much principal as you want in any given month during an initial period of time after your closing.

For many, the most appealing feature of an interest-only loan is that you control your payment amount and your cash flow in any given month during the interest-only period, and your monthly mortgage payment will be lower than it would be with an interest plus principal payment. Your interest rate may or may not be lower than a traditional mortgage, depending on your specific situation, but you will have the option of flexible payments.

Who Is an Interest-Only Home Loan For?

There are a number of reasons people consider interest-only loans. For instance, it might make good financial sense. On a traditional 30-year fixed, roughly 70% of the payment goes toward interest during the first six or seven years of the loan. If your interest rate is low, then you’ve borrowed money at a good rate.

Instead of paying down that low rate loan, the extra money each month from making interest-only payments can be investe in something that would bring a higher rate of return. Depending on the loan amount, you could have access to thousands of dollars over the course of several years to invest or reduce high interest debt, including credit card debt.

An interest-only home loan is sometimes considered an option for people who expect to be in their homes for less than ten years. The average homeowner stays in their home between five and seven years. As mentioned before, home mortgage payments are mostly interest for the first years of the loan. Many homeowners like the option of making interest-only payments and using the extra money as they please – save for college tuition, make home improvements, or buy a much-needed new car.

Common Misconceptions About Interest-Only Loans

A big misconception about interest-only mortgage refinancing is that if you’re not paying down your loan’s principal every month, you’re not building any home equity. Historically, homes in the U.S. have appreciated an average of 3% each year. Of course this varies with market conditions. But if you’re in an area of the country that is appreciating, you’ll still be building equity, even with an interest-only loan. If you’re unsure of your home’s value, try our home value calculator, or give our Mortgage Experts a call at (800) 654-0068 and we can help you decide which loan option is right for you.

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