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What is a Interest only Mortgage

Updated on June 4, 2012

When shopping for a home the type of mortgage that you choose can save you thousands of dollars. Let’s take a look at interest only mortgages. An interest only mortgage is one way that you can get an initial lower rate on your home purchase.

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How interest only Mortgages Work.

Interest only mortgages work by having a payment plan setup that will only pay the interest on the home for the first couple of years. This does a could of different things for the homeowner who chooses this type of mortgage.

1. Mortgage payments are a lot lower – This is because you are not paying the principal on the home.

2. Great for the first time buyers who are interested in having lower payments.

3. Payments on interest only last up to 120 months, which then payment increases for principal

4. The number of payments you have to make is reduced

5. Establish security in your home

So, if you are searching for an option to make a lower initial payment having an interest only mortgage might be right for you. The interest only mortgages are only valid for up to 120 months when you purchase the home. After that, your payments will go up to help reduce the principal.

There are two available types of interest only mortgages. The 30 year interest only mortgage and the 40 year interest only mortgage. The biggest difference in these two type s of montages is the length of the loan as well as the length you are allowed to make interest only payments. On the 30 year, loan only the first 60 months max that you are allowed to make interest only payments. The 40 year loan you can make them for 120 months.

Interest only montages are perfect for people who are a first time home buyer, because it will lower their initial monthly payment by a few hundred dollars. This allows people to become secure and take that money to reinvest in their property. It is also perfect for people who are in sales and receive commission or bonuses this puts them in a better position at the end of the year. This is also perfect for people who are older and on fixed incomes. It gives them the opportunity to save a little bit more for the first few years.

Yet, always remember that when you are paying interest only always try to make at least a few payments towards the principal if you can. A few hundred dollars a couple times a year will still substantially reduce the number of payments you have to make and lower your payments a little bit more when the interest only payments end.


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