There numerous types of mortgages available to finance your home. Interest only mortgage loans are one non traditional mortgage loan on the market today. These loans are often referred to as balloon mortgages. This type of mortgage is as the name implies an interest only loan. You will not pay back any or the principal balance or build equity in your home. At the end of the mortgage’s term the principle balance is due.
This type of mortgage loans is a popular choice for homeowners looking for the lowest monthly payment possible. Homeowners typically can qualify for a much larger amount with an interest only mortgage loan than they would be with a traditional mortgage loan.
To put this into context consider the mortgage on a $150,000 property. A traditional fixed interest rate mortgage with a 7% interest rate over 30 years would cost a homeowner $1000 a month. An interest only mortgage for the same property would have a monthly payment of only $690. This is a very attractive option for homeowners with a limited cash flow.
A good financial advisor will tell you to avoid these mortgages like the plague. These loans are ideal for homeowners who only plan on staying in the property for a few years; for anyone else steer clear. The problem with these loans is that you do not build equity in your home.
There are a few circumstances where interest only loans make sense, for example with investment homes. If you are purchasing a home to live in this is not the mortgage for you!