Interest Only Mortgages: What You Need to Know

A mortgage is called “Interest Only” when its monthly payment does not include the repayment of principal for a certain period of time. Interest Only loans have become popular in recent years, but they can be risky if you do not understand the full implications of this type of loan. Before you decide to take out an Interest Only mortgage, it is important to educate yourself on what these loans entail and how they can affect your finances in both the short and long term.

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How Do Interest Only Mortgages Work?

Interest Only mortgages are offered on fixed rate or adjustable rate mortgages as wells as on option ARMs. During the interest only period (which is usually 5-7 years) the borrower pays only interest each month, not principal. This results in lower monthly payments than with a fully amortizing loan. At the end of the interest only period, the loan becomes fully amortized, thus resulting in greatly increased monthly payments. The new payment will be larger than it would have been if it had been fully amortizing from the beginning. The longer the interest only period, the larger the new payment will be when the interest only period ends.

There Are Pros & Cons To Interest Only Mortgages

Interest Only mortgages can have some advantages; they may allow borrowers to qualify for larger loans due to their lower monthly payments, and they may provide flexibility if borrowers experience a temporary decrease in income due to illness or job loss during that time frame. However, there are also some major drawbacks associated with these types of loans; namely, borrowers are not building equity during that time frame and therefore missing out on potential tax benefits, and when their payments increase at the end of this period many borrowers may find themselves unable to make those increased payments leading to financial hardship or foreclosure.

If you are considering an Interest Only mortgage for your next home purchase, it is important to weigh both sides before making a decision. While these loans may seem appealing at first due to their lower monthly payments during the initial years, they come with a lot of risk if you do not plan ahead for when those payments become much higher at the end of that period. It is also important to remember that while you may qualify for a larger loan amount with an Interest Only mortgage compared with traditional mortgages, it might be better financially speaking to choose a loan that fits more comfortably within your budget right away rather than taking on additional debt without having any equity built up yet. Ultimately you should think carefully about all factors before deciding which loan is right for you.

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FHA Loans

FHA home loans are mortgages which are insured by the Federal Housing Administration (FHA), allowing borrowers to get low mortgage rates with a minimal down payment.

Conventional Loans

The most common type of loan option, the traditional fixed-rate mortgage includes monthly principal and interest payments which never change during the loan’s lifetime.

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Loans where the borrower is able to wrap many of the costs and closing costs into the loan, lowering the amount needed to close.

VA Loans (Veterans)

VA loans are mortgages guaranteed by the Department of Veteran Affairs. These loans offer military veterans exceptional benefits, including low interest rates and no down payment requirement.

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Brian Spitulski
NMLS# 880824

Haley Dickerson
NMLS # 2319236

 

Kevin
NMLS# 218326

John
NMLS# 1700043

Mark Villanueva

Home Buyer in Happy Valley

Brian helped my wife and I purchase our first home in Happy Valley. As first time homebuyers, there was a steep learning curve throughout the entire home buying process. Brian was very helpful and patient in explaining not only procedures involved with obtaining the mortgage, but also with anything other processes we had questions about. Brian even came to our escrow signing appointment to give the paperwork a final look. Brian still contacts us every few months to let us know how interest rates are looking and whether it would be beneficial to refinance. Big thumbs up to Brian and we'll definitely use him again when we're in the market for another property.

Sean Curringan

Vancouver Home Buyer

My wife and I have followed Brian from his previous company to him now at U-Mortgage. While his company has changed, his level of service has stayed light years ahead of the rest of the industry and for that, we’re very grateful! Buying a house is for most people, the largest purchase they will ever make, which can be a pretty scary situation. Brian goes above and beyond to ensure that the consumer knows exactly what is going on at all times. This can be as simple as explaining what certain fees are or possibly as complex as how best to boost a credit score. Whatever the case may be, Brian is amazing! I personally don’t know too many Mortgage Guys who go as far as making sure to be present at the final signings. Mr. Spitulski does this and much more. My wife and I plan on using Brian in the future and highly recommend anyone else going through the home purchase process to give Brian at least a shot, it’s well worth it!

R. Rogers

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Put your trust into Brian! You can tell he is honest and truly cares about his customers. He worked hard to get us the best possible interest rate (and keep it despite closing taking longer than expected due to an issue the sellers of our new house needed to work out). He patiently worked with us over the course of two years while we paid off debts, saved, and followed his advice to increase our credit scores. Once we were ready to go and found our dream home, Brian got everything mortgage-related done lightening fast! The whole process was so quick, easy and smooth I couldn’t believe it!! He was always quick to answer our millions of questions (this is our first house) and clearly works long hours to make sure his people are completely taken care of. Our experience couldn’t have been better!