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In the mortgage world there are many types of loans. There is the ARM mortgage, the standby fixed mortgage, biweekly mortgage and one that has been generating all kinds of attention, the interest only mortgage. Contrary to its name, an interest only mortgage isn't free of having to pay the principal. Let's take a look at interest only mortgages, who is ideally suited to obtain one, and why or why not one may be a good idea for you.

What Is An Interest Only Loan?

An interest only mortgage differs from other types of mortgages in that you only pay back the interest for a specific period of time, usually 5 to 10 years. After that time, you pay the principal in one lump sum, refinance, or start paying interest plus principal. These loans are ideal for people that have special payment situations.

Who Is Ideally Suited For An Interest Only Loan?

An interest only loan is ideal for executives that may have a low salary during the year, then receive large bonuses during the year. Because they are paying interest only, the principal can be put in other investments that have better return on investment, or kept fluid for emergencies. Another type of person that is well suited for an interest only loan is a business owner that may go through seasonal lean times, then have a rush at predictable times during a year. Again they may want to keep the funds they would have put toward the principal toward emergencies or savings.

But Beware Of The Pitfalls

The danger of an interest only loan is the temptation to spend the extra funds on things that have no return on investment. things like cars, boats, trips. Unless a person has a strong investment plan, they probably should stay away from an interest only mortgage.

Another real danger of interest only mortgages is the ability to borrow more than you really can afford. For example, if a typical principle and interest payment is $600 a month and you can get the same loan for $500 a month with a interest only loan, you could obtain more funds because suddenly you can afford more. That's great until the interest only period is done, and now you suddenly have to come up with an additional chunk per month. If you can't afford it, you will be in trouble.

So be aware there is interest only loans available. They may be a great option if you are suited for one. Discuss it with your lender. He will be able to tell you if it's a good idea for you, or if you should steer clear.

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