Interest Only Home Loans

When to Consider Interest Only Home Loans

Interest only home loans are advertised as a way to significantly cut your monthly mortgage payments. But are interest only home loans really a good idea? You may be surprised to learn that interest only home loans can cost you a great deal more in the long run, but can be a sound financial decision in other situations.

Interest only home loans are just what the name implies. The borrower is required to pay only the interest each month. To break it down even more, remember how loans work. The lender offers money to the borrower. The amount of the loan is the principle. Then interest is added - the lender's payment for making the loan. The borrower pays a monthly payment that includes some amount of interest and some amount of principle. After each payment, the borrower has the option of paying off the current principle amount.

But with interest only home loans, the amount of the principle owed never decreases. That means the borrower can pay interest on a $100,000 mortgage for 20 years or more, and at the end of that time the borrower will still owe $100,000 to the lender. So how could this ever be a good idea?

The point is that the borrower can pay toward the principle of interest only home loans at any point. Most people who choose interest only home loans have the intention of making those payments along the way. The problem is that it's too easy to let that optional principle payment slide. If you have the discipline to make those additional payments, interest only home loans can offer some good rates and terms.

One situation in which an interest only home loan can be a good idea is when home values are on the rise and the borrower plans to only stay in the house for a couple of years. In that case, the borrower can make the minimum payments on interest only home loans for that period of time with the assurance that he/she can sell the house for more than the principle loan amount when it's time to move on.