If you have been looking into buying a home, you probably have heard about interest only mortgage loans and are currently wondering whether this is the right option for you.

As the name already implies, the interest only mortgage loan is set up so that the borrower pays only on the interest of the loan for a set number of years. When the years of paying the interest rate only is done, payment will go towards the principal only.

What happens after the years of paying interest only is up, the borrower ‘trades in’ his interest only mortgage loan for a more traditional one and begins paying towards the principal balance. Usually, interest only mortgage loans are set up for the first ten years to pay the interest only.

Some people are interested in this type of mortgage loans because this type allows the borrower to have a much lower payment for the first ten years because during the first 10 years they will only be paying the interests and not the principle. If you are anticipating having an increased income within 10 years, you may be able to qualify for this type of loan. Real estate investors are also interested in this type of loans because it allows them to keep more cash flow to make home improvements before they sell the house. Some even take out interest only mortgage loans because they just want to keep more of the money in their pocket, knowing they will sell the property quickly.

However, there are some disadvantages to this type of mortgage. It is more risky to the borrower than a traditional mortgage. If you are paying towards the principle from the start as with traditional mortgage loans, what you are doing is actually building equity in your house although it may not be a lot. With interest only mortgage loans, you are not building any equity for the first 10 years.

By not building any equity for the first 10 years you may be unable to sell the house when you are ready to sell if that particular period of time is a buyer’s market. Also, a home equity loan or refinance is something that you won’t be able to get as it is based on the equity of your home.

Interest only mortgage loan is not recommended for regular wage earners. You can consider taking out interest only mortgage loan if you are:

• someone whose income is mostly in the form of infrequent commissions or bonuses;
• someone who expects to earn a lot more in a few years;
• someone who truly will invest the savings on the difference between an interest-only mortgage and an amortizing mortgage, and who is confident that the investments will make money.

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