Interest-Only Mortgages Pros and Cons

A mortgage loan that allows you to get 100% of the loan without paying back the monthly mortgage immediately. Sounds exciting, doesn't it? Well, that is what the interest-only mortgage loan offers.

Among all the various types of mortgage loans, interest-only mortgage loan allows you to pay only the interest rate for a specific period of time. Once this interest-only period ends, and you have managed to save a lot of money, you can now start paying the traditional mortgage.

So far, you would like the interest-only mortgage. Perhaps you would have made up your mind and decided you would apply for an interest-only mortgage to finance your next home. But that is only because, so far, we have only talked about the benefits of interest-only mortgages.

Just like other types of mortgages, the interest-only mortgage had its set of advantages and downsides. This can give you better clarity about going for this mortgage or not.

We will discuss interest-only mortgages and how they can bring value to your real estate investing journey.

Key Takeaways

When to Go For an Interest-Only Mortgage

Before jumping straight into the pros and cons of interest-only mortgages, let's first discuss the situations where you can benefit from this loan.

Income Streams About to Expand

You are confident that your income will increase. This can be in the form of getting another job or some other investment that will bring you high returns.

So, when it is time to start paying back the principal amount, you can use the benefits of an interest-only mortgage. You would now have the additional finances to make your mortgage payments.

Short Term Stay

Are you looking for a short-term stay? If so, the interest-only mortgage can bring you a lot of benefits. You can save a lot of money at the start to reinvest in other assets and properties.

Before the traditional mortgage period begins, you can sell the property and move into another home where you had invested.

Knowing the Property Will Appreciate

If you have consulted real estate experts and know the property will appreciate, an interest-only mortgage can help leverage many benefits. During the time in which you are only paying the interest amount, you can also invest in improving your home value.

When the interest payment period is about to end, and your property has appreciated, you can sell your home for profit.

Advantages of Interest-Only Mortgage

We have touched on some situations where Interest-only mortgages can be beneficial. You would be interested in knowing more benefits of interest-only mortgages, right? Here are some of the common ones.

More Monthly Savings

You have bought a house with a mortgage loan and must pay a monthly mortgage of $1400. But the benefit of the interest-only loan is that you don't have to pay $1400 every month from the start.

For a specified period, you will only have to pay off the interest, saving you a lot of money. If you have financial discipline, you can save money for future use or reinvest in other assets for profitable returns.

Pro Tip
You can use your savings to invest in a new home. Before the interest-only period ends, sell your current home, use the proceeds to pay off your mortgage, and move into a new home.

Unlock Higher Loans

Have you looked at properties and thought, "I can't afford it, even with a mortgage"? That's about to change, thanks to the interest-only mortgage. You can have a high loan amount approved to buy valuable properties.

And one of the best benefits of interest-only mortgages? Since your initial monthly payment is low, saving money during the interest-only period ends and paying when you have to make principal payments will be easier.

Flexible Payments

No one likes to be bounded by rules and restrictions, right? Usually, the interest-only mortgage gives you the freedom to start paying off your mortgage even during the initial period.

This can help you reduce the future burden of debt when the traditional mortgage repayment period starts.

Pro Tip
If you have an additional income and plan to live in the house for a long time, we suggest paying off your mortgage early.

Tax Deductions

If your monthly payment during the interest-only period is up to $1 million, we have good news for you. You can avail certain tax deductions on your payments.

You can contact your accountant to itemize the tax investment.

Disadvantages of Interest-Only Mortgage

As we are done with the benefits of interest-only mortgages, here are some drawbacks you would want to know.

No Equity during the Interest-Only Period

As you enjoy the low monthly payments during the interest-only period, there's a catch. During this period, you are not buying home equity. So, before you start paying the principal amount, the only way to own home equity is through the initial down payment.

Interest Rates Grow

If the interest-only mortgage is adjustable, your monthly mortgage payment fluctuates rapidly during the principal payment period. Like the adjustable-rate mortgage, it can make it hard to budget and allocate the right finances for your monthly expenses.

Expenses Rise

Do you remember when talking about the benefits of interest-only mortgages, we mentioned you could increase your monthly savings? If you don't recall, scroll up a few lines. Now that you see it, you will also see we have mentioned if you have financial discipline.

If you lose that discipline and tons of additional expenses, you may end up using up all of your savings during the interest-only period. This might leave you with limited finances to pay for your mortgage in the future or to invest in other assets.

Unpredictable Market Situation

The real estate market is not as simple as it may seem from the outside. The constant fluctuation in prices can impact your home value.

Were you planning on following our advice by buying a property for a short period and selling it when your home appreciates? If so, you may face an uncertain situation where your property may not increase in value.

That can result in not generating the money to finance your current home and apply for another loan.

The Bottom line

Interest-only mortgage rate gives you enough flexibility to secure the loan first and manage the mortgage payments afterward.

Are you impressed by the benefits of interest-only mortgages? Then you just need real estate to kick start the home-buying process. That's where we at HAR can help you out. As a Texas-based real estate, we help you secure the perfect deal to move into your dream home.

FAQs

1. What Is an Interest-Only Mortgage

An interest-only mortgage is a type of home loan that allows borrowers to pay only the interest on the loan for a specific period, with no principal payments required during that time. Principal payments begin after the interest-only period ends.

2. When Should You Consider an Interest-Only Mortgage?

You might consider an interest-only mortgage if you expect your income to increase, plan for a short-term stay in your home, or anticipate property appreciation. It can be advantageous when you have financial discipline and can benefit from lower initial monthly payments.

3. What Are the Advantages of Interest-Only Mortgages?

Advantages of interest-only mortgages include reduced initial monthly payments, the ability to qualify for higher loan amounts, flexible payment options, potential tax deductions, and the opportunity to save money or reinvest during the interest-only period.

4. What Are the Disadvantages of Interest-Only Mortgages?

Disadvantages of interest-only mortgages include not building home equity during the interest-only period, potential fluctuations in interest rates during the principal payment period, the risk of overspending during the interest-only period, and the unpredictability of the real estate market affecting property appreciation.

5. How Can I Benefit from an Interest-Only Mortgage?

To benefit from an interest-only mortgage, it's essential to have a clear financial plan and discipline to save or invest during the interest-only period. If you plan to live in the home for a longer period, consider making principal payments early to build home equity.