Over the last ten years or so, interest-only home loans have been getting stronger and more popular. An interest-only home loan is based on the idea that the buyer only has to pay the interest on the mortgage for a certain amount of time, usually between five and seven years. This sounds great until the interest-only period is over and it's time to pay off the principal. Since you signed the mortgage, you haven't made any progress on the principal. Still, interest-only loans may be the best choice for some people.
The Good:
The best thing about a home loan where you only pay the interest is that your payments will be much lower for at least five years after you sign the mortgage. This can help you buy a home that you might not have been able to buy otherwise. You can invest the money you saved on your first payments to get ready for the higher payments you'll have to make later. You can also get ready so that once the interest-only period is over, you can pay off the whole mortgage.
It should be becoming clearer that interest-only home loans are only for certain types of people. The loan can be great for someone who gets most of their money from commissions or bonuses. When the buyer doesn't get a bonus or commission, he can only make the minimum payment on the interest. When he does, he can pay off huge chunks of the principal. It could also be a good idea for someone who has a good chance of making more money before the interest-only part of the loan is over. This could be because they expect to get a raise or have a chance to invest the money they saved on their mortgage.
The Bad
Lenders and brokers are pushing interest-only home loans hard these days, which should tell you that they can be dangerous for a lot of different types of people. Wage and salary earners who don't know for sure that their income will go up in the next five years shouldn't sign up for an interest-only home loan.
Think about this: if you get an interest-only home loan with a seven-year interest-only payment period and pay the minimum payment every month for those seven years, you've wasted every single dollar you've paid. You still owe the full value of the house to your creditor. When that happens, you'll have to start paying both the interest and the principal, which will make your monthly payments skyrocket. Buyers shouldn't use an interest-only mortgage loan just to get a better house now. It should be used to save money on the first few payments so that you can buy a better home in the long run. If you don't fit any of these descriptions, you should probably avoid interest-only home loans.
