Payment Flexibility

Most, if not all, interest-only mortgages are actually traditional mortgages which have merely added an option that allows for interest-only payments for a set amount of time, often for half of the loan period. In other words, a 30-year fixed-rate loan may have an option allowing the borrower to make interest-only payments for the first 15 years of the loan. After the first 15 years the loan will become a fully-amortized 15-year loan.

For people who do not have steady jobs or who have seasonal work or who are starting their own business, having an option which allows for a smaller mortgage payment when needed can be a real life-saver.

Making interest-only payments has its drawbacks. Since principal is not being reduced when interest-only payments are made, you will end up paying considerably more interest over the life of the loan. The other drawback is that when the interest-only option ends, often at the end of 15 years, the remaining loan balance is converted into a fully-amortized 15-year loan. This often means that there is a surprising and substantial jump in the monthly mortgage payment.

One of the big benefits of an interest-only loan is the flexibility in monthly payments. When cash is short it is possible to make a smaller, interest-only, payment without getting an ugly letter from the lender. When cash is more plentiful you have the option of making full payments or even making additional payments to make up for some of the interest-only payments.

Another advantage of the interest-only loan option is that whether you take advantage of your ability to pay only the interest portion of your monthly mortgage payment or whether you elect to make a full principal and interest payment you still get to take full advantage of the tax savings of the mortgage interest payment.