What is an Interest Only Mortgage?

An Interest Only mortgage is divided into two payment periods. The first period is the interest-only period, where borrowers must only pay the interest on their mortgage. After the interest-only time period, you’ll be responsible for both interest and principal payments (similar to most other mortgage loans). Interest Only Mortgages can be fixed or adjustable.

Benefits of an Interest Only Mortgage include:

• Low Initial Payment: Since you’re only responsible for interest payments during the initial time period, your monthly payment will be quite low for that set amount of time.
• More Financial Freedom: A lower mortgage payment could allow you to invest extra money in your business, retirement account, or the stock market. You may also use the extra money to pay off a more immediate debt.

Disadvantages of an Interest Only Mortgage include:

• Significant Payment Increase: After the interest-only period, you will have to pay both interest and principal. This will significantly increase your monthly mortgage payment.
• More Risk: Since your monthly mortgage payment will significantly increase after the interest-only period, an Interest Only Mortgage poses more risk. Before agreeing to an Interest Only Mortgage, fully assess your future finances (e.g. job security, income prediction).

Who Should Consider an Interest Only Mortgage?
An Interest Only Mortgage is a great option for individuals who currently have limited monthly cash flow but expect more income in the coming years; investors who do not want to tie up a lot of money into a property; or short-term homeowners who can quickly pay off the mortgage.