What are the advantages and disadvantages of an interest only mortgage loan?

Question

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Answer 1

Your payments will be higher and the loan will take longer to pay off

Answer 2

The only advantage is that you get to live in the house and have smaller payments at the start.

In the long run you will pay much more for the house. The whole idea is that in the future you will be better able to make larger payments because you will have a better income. Sometimes this is true and sometimes it is not true.

By the way. Almost any bank will agree to take an interest only payment on any mortgage loan if money get tight. So getting a standard fixed rate mortgage is the way that I have always gone. I've been fortunate not to have needed to make interest only payments but my bank made it clear that it would be fine with them if I had to.

Answer 3

Think of it as rent. You are paying nothing on the principal of the loan - so the loan doesn't actually get paid back. If you're going to sell in the near future, this doesn't matter too much, so long as the value of the property goes up. Over the long term, however, it will cost you a bundle more - these loans are not recommended for people who plan on staying where they are and putting down roots.

I always pay on the principal as well as the interest - that way, I gain equity in the house. And that's why, when I sell, I can afford to buy bigger houses in better neighbourhoods these days - that go up in value faster.

Answer 4

These were popular in high growth area's (like Florida) and were for folks who wanted into the market at a reasonable cost. They then could flip the property and make a profit. The problem was/is if the market drops, your stuck with a property you can't turn over (at a profit) plus you have no equity in it.