Qualifying Income

With an interest-only mortgage option you are only required to make the interest portion of your monthly mortgage payment and you are not required to make any payment toward the reduction of your principal as you would be in a fully amortized loan.

Since you are not required to make a payment against principal each month, the income you need to qualify for an interest-only loan is less than the income you would need to qualify for a traditional fully-amortized loan.

This means your income will qualify you to purchase a more expensive home with an interest-only loan than you would qualify for if you opted for the more traditional fully-amortized loan.

Many people like this feature of an interest-only loan which, in effect, increases your qualifying income without an actual increase in your monthly take-home pay. There are risks, however, when you stretch your income with an interest-only loan.

The typical interest-only loan starts as a typical 30-year loan but has the added option of an interest-only payment for the first 15 years of the life of the loan. After the first 15 years the loan is automatically reconfigured as a fully-amortized 15-year loan.

If little or none of the principal has been paid down during the initial 15 years of the loan – when the interest-only payment option was in effect – then transforming the entire remaining principal into a fully amortized 15 year loan will more than double the monthly mortgage payments.

If the borrower is not able to make the increased mortgage payments and plans were made to sell the property, then interest rates and other factors at the time of sale could make selling the property more difficult than would have anticipated 15 years back in time.

Interest-only loans are not for everyone and more than one plan for ending the interest-only option-period of the loan must be made – preferably before the loan is signed.