With an interest-only loan, you aren’t building equity on your home until you begin making payments towards the principal.

You’re not building equity in the home: Building equity is important if you want your home to increase in value.

Rates may be lower: This type of mortgage is usually structured as an adjustable-rate loan, which may result in lower rates than a fixed mortgage.Ĭhoosing an interest-only loan could be a risk for borrowers. Some cons with this type of loan include:.

Possible increase to your cash flow: Lower monthly payments can leave you with a few extra dollars in your budget.

When it comes to a conventional loan, extra payments can reduce the principal, but the monthly payments remain the same.

Can be paid off faster than a conventional loan : If you’re making extra payments towards an interest-only loan, the lower principal can generate a lower payment each month.May help you afford a pricier home: You may be able to borrow a larger sum of money because of the lower interest-only payments during the introductory period.The initial monthly payments are usually lower: Since you’re only making payments towards interest the first several years, your monthly payments are usually lower compared to some other loans.Interest-only loans may make financial sense for some borrowers because: While an interest-only loan may sound appealing for people looking to keep their payments low, it can be more difficult to get approved and is typically more accessible for people with significant savings, high credit scores and a low debt-to-income ratio. Making payments towards just the interest may be convenient if you aren’t permanently living in the home yet. Some people buy a second home and eventually turn it into their primary home. If you’re looking to buy a second home, you may want to consider an interest-only loan. Common candidates for an interest-only mortgage are people who aren’t looking to own a home for the long-term - they may be frequent movers or are purchasing the home as a short-term investment. If you’re interested in keeping your month-to-month housing costs low, an interest-only loan may be a good option. When this interest-only period ends, your monthly payment amount will raise substantially with the inclusion of both principal and interest payments. The interest rate on an ARM Loan can increase or decrease throughout the length of your loan, so when your rate adjusts, your payment will change too.įor example, if you take out a $100,000 interest-only ARM at five percent, with an interest only period of 10 years, you’d have to pay about $417 per month (only towards the interest) for the first 10 years. This is repaid in either a lump sum or in subsequent payments. After this introductory period, you’ll start to repay both principal and interest. Most interest-only loans are structured as an adjustable-rate mortgage (ARM) and the ability to make interest-only payments can last up to 10 years.

Keep in mind that the amount of time you have for repaying the principal is shorter than your overall loan term. You have the option of making principal payments during your interest-only payment term, but once the interest-only period ends, both interest and principal payments are required. Though this may sound like an exciting opportunity to help save on your mortgage payments, before exploring interest-only loan options, learning how they work is key.Īn important thing to remember about interest-only mortgages is: Once the interest-only period ends, you begin paying both the interest and principal. To put it simply, an interest-only mortgage is when you only pay interest the first several years of the loan - making your monthly payments lower when you first start making mortgage payments.

Interest only mortgage calculator