Interest Only Mortgage Rate: What This Means and Who Benefits Most

If you are in search of information regarding an interest only mortgage rate, you are probably researching to see if this is a good option for you. Many people do not know that this means or how it works, or whether they would benefit. The information found below will help you determine if this type of mortgage is suitable for your needs.

What is an interest only mortgage rate?

Simply stated, this is an effective way to have lower monthly mortgage payments when you need to pay the minimum amount possible for any number of reasons. Typically, homeowners can pay the interest-only mortgage payments for 5 to 10 years, at which time they will have to start paying the mortgage payment that includes principal. The lower the interest rate, the lower the payment would be. Interest only mortgage rates may change often due to the fact that most are adjustable rate, so the amount you pay may vary from time to time.

Here is an example of how an interest only mortgage rate works.

Suppose you want to secure an interest only mortgage loan on your remaining balance of $200,000. If the current interest rate is 6%, you will multiply $200,000 x .0600, then divide that number by 12 for 12 months in the year if you pay your mortgage on a monthly basis. In this example, the monthly payment would be $1,000.

Be aware that when you choose to go this route, you are paying toward the interest on your home only, and no payment is going toward the principal. Even if you continue to make interest only mortgage payment for 10 years, the principal will remain the same.

Benefits of an interest only mortgage

While this type of loan is certainly not for everyone, there are some who will benefit by obtaining an interest only mortgage. For example:

If you want to invest some of your money, you may want to invest the savings you experience between an amorizing mortgage and one that is interest only. If you save $240 per month and are confident that you can invest the savings, this may be a smart choice for you. Unless you regularly invest and know for certain that this is what you will use the savings for, avoid an interest only loan.

Those with the inability to earn a stable income might also benefit. For example, if you work in sales or another capacity where you get large bonuses 2 to 3 times each year, you may want to go with an interest only mortgage so that your payments are lower, then pay a substantial amount on the principal of your loan when you get those large bonuses.

Interest only mortgage rates do fluctuate, and it’s a smart idea to shop around in order to get the best possible rate. Consider this type of loan carefully before you make a decision.