If you’re like many buyers, you may have heard of interest-only mortgages. But what are these types of loans, what are they good for, and should you use one to buy a home? Though we’re not financial advisers (and you should talk to a qualified financial planner to get advice on your personal situation), this guide can help you understand what interest-only mortgages are so you can decide whether getting into one is a good choice for you.
What is an Interest-Only Mortgage?
An interest-only mortgage is a special type of loan where you only make payments on the interest each month for a certain number of years. After that period expires, usually 5-7 years, then you begin paying down the principal as well.
Why Choose an Interest-Only Mortgage?
Interest-only mortgages may sound appealing to some buyers because they offer lower payments in the short-term. This can be a great way for buyers who may not have much of a down payment to get into a home, as well as for those who want or need more flexibility with their budget.
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ARMs (Adjustable-Rate Mortgages) Explained
Interest-only mortgages are often ARMs, or adjustable-rate mortgages. This means that after the interest-only period, your interest rate may change, meaning that your payments could go up. It’s important to carefully consider these risks before choosing this type of loan option.
Advantages and Disadvantages to Interest-Only Mortgages
When considering an interest-only mortgage, it’s important to weigh the pros and cons of this type of loan.
Advantages:
- Lower payments in the short-term
- More flexibility with budgeting
- The option to pay down principal at any time during the interest-only period
Disadvantages:
- Higher payments after the interest-only period ends
- Potential for an increase in interest rate with an ARM
- Less access to equity as you are not building up any equity during the interest-only period
Ultimately, what kind of mortgage is best for you depends on your specific needs. Be sure to carefully consider all of your options before making any decisions. And if you have more questions, speak with a qualified financial planner who can offer personalized advice.
Now that you know the basics of interest-only mortgages, you’re better equipped to decide if this type of loan is right for you. Be sure to do your research and always talk to a qualified financial professional.
Related: 10 Benefits of Buying Recreational Land in North Florida
Are You Buying a Home or Land for Sale in Lake City?
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