Question:

What are the benefits of interest only mortgage loans?

Answer:

There are a lot of benefits of Interest Only mortgage loans. However, those will be available mostly to consumers who are risk-oriented and are educated enough about the risks, advantages and disadvantages of those mortgage products.

Major Benefits of Interest-Only Mortgages

IO loans operate under the assumption that paying only interest frees enough cash to invest some place else - stocks and bonds with higher return, or a business, or simply wait until your income grows naturally with your career.

Also, since the IO option exists along with the option for paying principal and interest and larger loan prepayment amounts, having to pay interest only on a monthly basis and making huge annual installments significantly reduces the interest cost of the loan.

At the end of the Interest Only period, which usually spans 5 to 10 years (shorter and longer terms are also available), the borrower is expected to pay off the IO home loan with a lump sum, or refinance.

The following type of consumers usually utilize the most the pros of interest only mortgage loans:

  • Financial savvy borrowers who are certain that savings from principal will bring higher return in other investment vehicles;
  • People on irregular income, such as seasonal business or commissions;
  • Lawyers and doctors whose income is expected to grow steadily over the years and the self-employed, business owners or high net worth individuals.

According to your financial advisor, though, there will be huge disadvantages of interest-only home loans.

  • Higher foreclosure risk associated with inability to afford the higher monthly payments when the interest-only term is over;
  • Additional risk with interest-only adjustable rate mortgages (ARMs);
  • Borrower's lack of financial discipline or lack of knowledgebase to properly invest whatever savings are available from the IO mortgage loan;

Expected income growth or home value appreciation may not come true.

Mortgage rates hit their lowest since 1955. Ask the home loan experts we recommend Quicken Loans how to take advantage of them.
Was this Mortgage QnA helpful?
Not at all
  • Currently 2.9/5 Stars
  • 1
  • 2
  • 3
  • 4
  • 5
Definitely
Add to this Answer

Mortgage QnA is not a common forum. We have special rules:

  • Post no questions here. To ask a question, click the Ask a Question link
  • We will not publish answers that include any form of advertising
  • Add your answer only if it will contrubute to the quality of this Mortgage QnA and help future readers
If you have trouble reading the code, click on the code itself to generate a new random code. Verification Code Above:
Bookmark and share this QnA: