Loan options overview -> Interest only

Interest only

An interest only payment option can be a useful financial tool
in the right circumstance.

With an interest-only mortgage you can pay mortgage interest, and no principal, for a specified period of time, generally three, five, seven, or ten years. Your mortgage balance remains the same; it does not increase, or decrease. Since the financial crisis these loans have become much less common. A more conservative approach to mortgage finance has made interest-only loans more expensive and more difficult to qualify for. Consumers today are also more likely to choose a loan that includes some principal pay-down with the monthly payment.

ADVANTAGES DISADVANTAGES
  • Lower minimum payment
  • Flexibility—pay principal if you choose
  • Loan balance does not decrease over time
  • Payment may rise sharply after the interest-only period
  • You don’t have the ‘forced savings’ of a principal and interest mortgage

 
However, there are situations where opting for an interest-only mortgage payment may be a smart strategic choice. Since these loans are always ARMs fixed for three, five, seven, or ten years, you first want to be sure that an ARM is right for your situation. Check Fixed vs. Adjustable. If you are not as concerned about building equity with a principal payment as you are with current cash flow, an interest only payment may make sense, especially in the case of an impending liquidity event or large increase in income. Examples might be an associate at a law firm who expects to be made a partner, a physician completing a residency, or an employee taking stock and a relatively low salary in a firm that is planning to go public. Paying interest-only during the interest-only period is optional. You can always pay more than the interest-only payment each month if you choose, which will be credited to principal, and reduce your loan balance.