Interest Only Mortgage Loan Pays The Principal Later

2007-03-08 10:33:40

( Financial )



If you are getting a mortgage loan for a house, an interest only mortgage loan is one option. Essentially, an interest only mortgage loan allows you to pay only the interest on the loan for a certain period.

Since interest only loans require that only the interest is paid, this means that you are not paying down principal. You will do so only at some period in the future, depending on the terms in your interest only mortgage loan agreement.

One advantage of an interest only financing package is the affordability, which would be similar to low interest student loans. Your mortgage payments are lower in the early years of the loan, so you have extra money for your other needs. Remember that the price for the lower payments during the interest only period is higher payments later.

Another benefit of interest only mortgage loan is that you can invest the money at your disposal. If you could invest the money at returns greater than the interest on your loan, then it makes sense to keep it instead of paying down your mortgage.

You could also use the money to pay your higher interest loans, like credit card debt. The cost on your interest only mortgage loan will necessarily be lower than the cost of unsecured debt, so it is wise to allocate more money to paying the high interest loans.

Interest only loans would be most useful to you if you intend to hold the property for only a short while, perhaps long enough to make some improvements and then sell the property. In this case, you wouldn’t have to think too much about principal repayment.

But if you stay much longer in the house, the interest only mortgage loan will allow you to save in the early years so you accumulate enough capital to settle principal later.


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