Interest Only Mortgages
An interest only mortgage is a loan allows you to pay the lender only the interest you owe on the money you borrow -- for a while. Of course, the bank is going to want their money back sooner or later. An interest only loan will give you a set period where you pay only interest before you start repaying the principal. After that, it is much like a conventional mortgage where you pay interest and some of the principal every month. Different lenders offer different terms; three, five, seven or ten years before you have to begin repaying the principal. Interest only mortgages are a type of balloon payment mortgage. You can find fixed rate and adjustable rate interest only loans.
The advantage of an interest only mortgage is that your monthly payments start out considerably smaller compared to a conventional mortgage during the interest only portion of the loan. This may let you afford a more expensive home now if you expect to be earning more money within a few years. Or, if you are the gambling sort, you can invest the money that you aren't paying to the bank if you think you can get a better return than the mortgage's interest rate.
One of the disadvantages to an interest only loan is that you end up paying more interest over the life of the loan. You also need to be prepared for a dramatic increase in your monthly payment when you have to begin to repay the principal. Remember, you're going to have to pay off the principal in less than 30 years, so you have to repay more principal each month.
Another potential problem with an interest only loan is what happens if you need to sell your house and it is worth less than when you bought it. You still owe the bank all the money you borrowed. If you can't sell your house for what you paid for it, you have to make up the difference out of your pocket.
Interest only mortgages offer savvy borrowers a useful option. But, they require fully understanding what you are getting into before you borrow. You should consult with a lawyer and/or a financial professional before you borrow.