When purchasing a home with an Interest Only mortgage, you pay only the interest owed on your loan in each monthly payment, as opposed to traditional loans where monthly mortgage payments go towards both interest costs and the loan balance.
The option to make interest payments only is typically for a fixed term, usually between 5 to 10 years. Since each monthly payment only goes toward the interest, your loan balance does not decrease during the fixed term, unless you make additional payments toward the principal loan amount. Interest Only Mortgages have many benefits including:
- Lower monthly mortgage payment
- Additional cash available to pay toward higher-interest debts
- More control over cash flow
- The entire monthly payment during the interest only period usually qualifies as tax-deductible. Be sure to consult your tax adviser.
- If it’s a short-term investment property such as a fixer upper, interest only payments help keep costs low so your money is available to be leveraged in other areas.
During this time frame, you have the right to pay more than the interest payment if you want. However, if you opt not to pay toward the principal loan amount then the loan balance remains the same.
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