There are many different home loan options available to consumers today, including the interest only loan. The interest only home loan is a choice that fits into many consumers’ budgets, and is often easier to get approved for than a traditional fixed rate mortgage. As with any financing choice, there are benefits and drawbacks to an interest only home loan. 

An interest only home loan is basically a mortgage loan which allows the borrower to pay only the interest, and then pay the principal. A traditional home loan will pay off some of the interest and some of the principal with each mortgage payment. An interest only home loan will have lower monthly mortgage payments than a traditional fixed rate mortgage program.

The biggest advantage to an interest only home loan is that it allows the borrower to pay lower monthly mortgage payments. With lower monthly mortgage payments, a borrower can afford to purchase a more expensive home. The reduced mortgage payments of an interest only loan also allow the home owner to spend more money on other things, such as home improvements, family vacations, new vehicles or a child’s college tuition. This is positive for mortgage borrowers who have other debts that they are paying off every month as well.

An interest only home loan is more beneficial for home owners that use them properly. A home owner can choose an interest only home loan when because their income varies during different parts of the year. These home owners might save on their monthly mortgage payment and make larger mortgage payments against the principal during the parts of the year that they have extra money.

Mortgage borrowers can also choose an interest only home loan because they want to create their own custom amortization schedule. In many cases, the additional payments against the principal will result in a lower required payment in following months. This is because the principal amount that they’re paying interest on has decreased.

There are, of course, drawbacks to interest only loans. The drawbacks come form the fact that interest only loans don’t build equity. Interest only borrowers aren’t building wealth for themselves, and this can be especially detrimental if their home loses value before they sell it. Interest only home loan borrowers also won’t increase equity that they could borrow against later with a home mortgage refinance.  When mortgage borrowers only pay the interest, they don’t reduce the balance on their loan. Instead, they’re just putting off the inevitable debt.

Many home owners end up selling their homes or refinancing mortgage rates to pay off their interest only home loans. If they end up keeping the interest only loan, the bank might make them pay back the principal of the home loan after ten years or so. A mortgage lender will explain this further to anyone interested in an interest only home loan.