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. 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. Keep in mind that generally the amount of time you have for repaying the principal is shorter than your overall loan term.
Construction to Perm loans are generally structured as Interest only during the construction period.
If you’re interested in keeping your month-to-month housing costs low, an interest-only loan may be a good option. 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 looking to buy a second home, you may want to consider an interest-only loan. Some people buy a second home and eventually turn it into their primary home. Making payments towards just the interest may be convenient if you aren’t permanently living in the home yet.
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.
Interest-only loans may make financial sense for some borrowers because:
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.
Possible increase to your cash flow: Lower monthly payments can leave you with a few extra dollars in your budget.
Choosing an interest-only loan could be a risk for borrowers. Some cons with this type of loan include:
You’re not building equity in the home: Building equity is important if you want your home to increase in value. With an interest-only loan, you aren’t building equity on your home until you begin making payments towards the principal.
Low payments are temporary: Low monthly payments for a short period of time may sound appealing, but they don’t last forever — it doesn’t eliminate the eventuality of paying back your full loan. Once the interest-only period ends, your payments will increase significantly.
Interest rates can go up: Interest-only loans usually come with variable interest rates. If rates rise after the initial fixed period, so will the amount of interest you pay on your mortgage.
Interest Rates Can be Higher: Rate of interest only loans is usually higher, even though your payment may be lower.
Reach out to a FDM Mortgage Professional to see if Interest Only loan makes sense for your needs.