What’s the Hype around Interest Only Mortgages?
While interest only mortgages aren’t entirely new to the market, they have been getting more attention in the past few years. Unlike traditional mortgages, interest only, adjustable-rate mortgages allow you to only pay the interest on your mortgage for a period of time, with your remaining interest and principal payments modified to an adjustable-rate at the end of your term.
For many individuals, these mortgages offer great benefits. However, there are also key considerations to take into account when using this product for your home purchase or refinance.
What are the key benefits?
Interest only mortgages can help you:
- Keep your current costs low since interest is the only payment that will be due during the term of the loan.
- Maximize your cash flow by allowing you to only pay interest for the length of the term.
- Build net worth by taking the money that would have been going towards monthly principal payments and investing it in a vehicle that can earn higher returns than money markets or interest-bearing checking accounts.
- Receive potential tax benefits because the whole amount of your monthly payment may qualify as tax-deductible during the interest only payment.
What are the risks?
No matter what mortgage product you look at, there are going to be pros and cons. For interest only mortgages, it is important to consider:
- Your commitment to investing your funds – Most individuals and families use an interest only mortgage so that they can invest their funds in higher earning vehicles, but some people may be more inclined to spend the money rather than invest it. Be sure you understand how you want to use those cost savings today so that you are prepared for expenses tomorrow.
- The investment vehicle used for your funds – There is always risk that investments will not grow as quickly as planned, so it is important to review your financial situation with an advisor so that you are prepared if your investments do not do as well as anticipated.
- Principal payments at the end of the interest only term – At the end of the interest only period, you will owe principal and interest payments on your loan, so it is important to speak with a financial advisor so that you have a plan in place to manage these payments.
While there are risks to consider, interest only mortgages can be a great alternative to traditional mortgage loans. Good candidates for this type of loan are typically committed to saving their extra funds and have reasonable confidence that the investment vehicle they choose will generate a solid return.
In addition to using these loans to free up more capital for investments, interest only home loans can also be more attractive than traditional mortgages for individuals and families who are not planning to stay in their home for the full term of the loan.
For anyone interested in purchasing a new home or refinancing their existing mortgage, it is important to sit down with a lender who takes the time to understand your particular financial situation and can tailor a loan program to meet your specific needs.
If you are interested in learning more about our new interest only mortgages, our mortgage rates, or what mortgage might be best for your needs, reach out to your relationship manager or fill out the form below to request more information.