Making your monthly payments lower than they would be if you were paying for a mortgage as standard, interest-only mortgages begin with payments that only cover the interest. If you’re in a position where you might struggle to make high mortgage payments each month, this type of mortgage could work for you, but without taking the time to think carefully about it, and ideally discuss it with your financial advisor or mortgage broker, you could experience its drawbacks.
Below are some of the pros and cons of an interest-only mortgage:
- They give you time to increase your income. If you are expecting to increase your income in the near future, then you may benefit from an interest-only mortgage, as it gives you more purchasing power now while you need it, and then you can readjust once your future earnings increase.
- You can afford to speculate
If you have a strong idea that the property you’ve purchased will go up in value, then an interest-only loan enables you to save money now, and then before the full repayment period begins, you can sell the property; a fantastic way to make the most of your profits if you’re a house flipper.
- Your cashflow becomes free
Asone of the most affordable ways to borrow money for a property, these loans give you the extra cash you need to pay off your debts or put money into another project.
- You’ll get a tax break
If you itemize your taxes, you could deduct your entire monthly interest-only payments on up to $750,000 of the value of your home with this type of mortgage.
- You can make extra payments on your principal
In general, these loans have no restrictions on extra principal payments, so if you come into some cash sooner than expected, you can pay off more of your principal and lower your debt.
- You can’t build equity
Only by making full mortgage payments can you build equity; with an interest-only loan, it’s not possible to do this.
- They cost more
Over time, interest-only loans will always end up costing you more than ARMs or fixed-rate mortgages.
- Switching to a full payment can hit you hard
You should only ever accept an interest-only loan if you’re confident that you’ll be able to make the full repayments when the time comes.
- Your ability to sell or refinance could be limited
Speculative purchases are always risky, and if the property you’ve bought goes down in value, your ability to sell or refinance will be limited.
- They are always considered to be high risk
With the way the economy is right now, and less lenders are opting to offer interest-only loans due to their high risk.
With so many mortgage options to choose from, if you’re in any doubt as to whether an interest-only mortgage is the right choice for you, you can seek professional advice from a mortgage specialist and make sure you make the right decision that takes all of your personal circumstances into consideration.