A Mortgage Rate, or a Rate without Mortgage?

Homebuyers and homeowners looking to purchase a mortgage or refinance are usually smiling when they catch wind of interest-only mortgage. After all, the words “interest only” ring similar to “almost free,” don’t they? Now, c’mon. You know nothing in life is free. Definitely, not a mortgage! So how can this be, what does this “interest only” mean?

Interest-only mortgage is not a dream come true, but it may be a plausible solution to lowering your mortgage payments. This does not mean that you don’t have to pay off the principal loan, but it does mean that you can receive bills for just interest for a certain amount of time, before having to ever pay part of the actual loan amount. You get to decide when you pay the principal, and you won’t be required to start paying it for five to ten years, in most cases.

With some lenders, you will be required to make additional payments upfront, or prepayments, before you are given the interest only period. Others do not require any prepayments. There can also be limits on how much the rate can change over the duration of the loan, to ensure that the lender will get paid adequately regardless of the nature of the market.

Interest-only mortgages are good for people in fields where their income is sporadic or unpredictable. For example, salespeople on commission may have a meager base income but large bonuses after a sale. Entrepreneurs may only be making a little starting off, but they will get large jumps in their income once a business or project takes off. People in these kinds of professions may benefit from an interest-only mortgage because they are relieved of high monthly payments now, and are able to pay off the principal at their own pace. Still, the loan must be paid off, and after a specific number of years the principal payments will be mandatory.

Interest-only mortgage may sound like a hoax. It’s not. You can get a mortgage that requires you to pay interest alone for a fixed period of time, but remember that it is still a mortgage, and you are still required to pay it off eventually.

This is a good choice for people that will have the money later but do not have sufficient income to pay the principal payments now, or for people who have an abnormal payment schedule and/or have a variable income. Remember: this option allows you freedom, but it still holds you to the same commitment as any loan.