An interest only mortgage is a mortgage option in which you are only expected to pay the interest on your mortgage. If you do this, nothing will be applied to the principal of the loan. An interest only loan payment option can be attached to both an adjustable rate mortgage and a fixed rate mortgage. Generally the interest only payment option is only available for a set time, after which you must pay off the entire loan, refinance or your payments will go up to start paying down the principal.
Many people consider the interest only payment option when they have an unpredictable salary. This option allows them to vary the loan payments according to their income for the month, as long as they make the minimum payment. Young professionals may also consider this loan, since they plan on seeing an increase in their income over the next few years. Other people use it to buy more house than they can really afford to buy.
Generally it is best to steer clear of the interest only payment option. It may end up costing you much more in the long run, because you are not making a significant dent in the principal. Additionally the market may change, and you may not be able to refinance they way that you thought you would be able to. Many people may initially plan to use their bonuses to pay down the loan, but find that they lack the discipline necessary to do this.
Additionally you are not building wealth or equity when using an interest only loan, and if your home loses value, you will still have to pay off the original loan amount. This is dangerous in an unstable economy. Many people find themselves scrambling when it comes time to pay off the loan or refinance. They may end up losing their home, if they cannot find the money or refinance.
