Interest-only payments

Some lenders will offer loans that allow you to make interest-only mortgage payments for a set number of years. These relatively new programs are typically fixed-rate, and the term is usually long, i.e., most take around 30 years to repay.

One of the reasons that fixed-rate mortgages are so popular is because they offer the borrower the stability of a monthly payment that will stay the same over the years.

However, fixed-rate mortgages, which allow borrowers to first pay the interest, work a bit differently. Namely, the mortgage payment will be smaller toward the beginning, and increase toward the end. That means that you must be prepared to eventually make larger mortgage payments.

Since mortgage payments are small for the first half of the loan, these mortgages are a great alternative for any borrower whose budget can’t, for whatever reason, accommodate a normal monthly payment.

For instance, some borrowers may want to spend a few years paying down debts that have a higher interest rate (like credit cards). Other borrowers might be in the process of repaying student loans. Whatever the case, a lot of people find such programs to be very helpful.

Of course, the interest rate attached to these loans is a little higher. That means that even though your mortgage payments will be low in the beginning, you will ultimately pay more for your loan than someone else who opts for a more conventional repayment terms.

You can help make up for the increased interest by making prepayments whenever you find that you have the have extra money. Prepayment will help you pay back the loan faster, and help you start building equity even in the interest-only period.