Question:

Interest Only mortgage pros and cons – what are they?

Answer:

IO loans have existed for a long time. The pros and cons of interest only mortgage loans are easy to see when you are an experienced investor or financial savvy home buyer. Typical IO loans are fixed rate mortgages with Interest Only payment option for 2 to 10 years. They carry higher interest rates than a loan without the IO option. All this said, you should know how things can possibly work out for you.

There are other loans, like the Option ARM mortgages, with embedded IO option. However, though, these are different loans, they can be more dangerous than IO loans and sometimes are misleadingly advertised like pure interest-only loans.

Pros of Standard Fixed Rate Interest Only Home Loans

  • Great advantage of the interest-only loan with fixed rate is the possibility for making interest-only payments for several years. This is cash that can be used towards a retirement plan, stock and bonds investments, or for business improvements.
  • If you are on a commission, a business owner, or you have some kind of additional irregular income, IO loans are great because you can stick to the IO payment whenever you are cash restrained, and repay the principal when you can afford it.
  • With Interest Only mortgage loans sometimes you can qualify for a larger loan amount. However, currently most IO and Option ARM loans are underwritten for the fully indexed rate (FIR). You need to have excellent credit to make use of this option.

Disadvantages of the Interest Only Home Mortgage

  • Using up the IO option and not increasing your income to accommodate higher monthly payment or partially prepay the loan before the interest-only period is over can cause payment shock. IO loan monthly payment may easily double after the IO term is over.
  • Home market values depreciation can make it difficult to refinance, or sell the house to cover mortgage debt.
  • If it is an interest-only adjustable rate mortgage, your monthly payment may rise significantly and you will still be paying nothing towards principal. IO ARM loans make no sense if the IO term and rate is not fixed for at least 2 or 3 years. Don't bother taking those.

Final piece of advice:

You are advised to read about Option ARMs and Hybrid Option ARM loans. Pure Option ARMs are more flexible and more dangerous in a way than IO loans. Hybrid Option ARMs are still as flexible as Option ARMs but also quite more stable and predictable, as IO mortgages.

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 3/5 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: