Interest-only loans give you the flexibility of paying interest-only or interest and principal each month.

Interest-only home loans can have a fixed or adjustable mortgage rate.

The monthly payment flexibility of an interest-only loan can help you deal with unexpected expenses, finance home improvements, or pay down high-interest debt.

An interest-only loan is one that gives you the option of paying just the interest or the interest and as much principal as you want in any given month during an initial period of time after your closing.

For many, the most appealing feature of an interest-only loan is that you control your payment amount and your cash flow in any given month during the interest-only period, and your monthly mortgage payment will be lower than it would be with an interest plus principal payment. Your interest rate may or may not be lower than a traditional mortgage, depending on your specific situation, but you will have the option of flexible payments.

Who Is an Interest-Only Home Loan For?

There are a number of good reasons to consider an interest only loan. For instance, it might make good financial sense. On a traditional 30-year fixed-rate mortgage, roughly 70% of the payment goes toward interest during the first six or seven years of the loan. If your interest rate is low, then you've borrowed money at a good rate.

Instead of paying down that low rate loan, you could take the extra money you'd have each month from making interest-only payments, and invest it in something that would bring you a higher rate of return. Depending on your loan amount, you could have access to thousands of dollars over the course of several years to invest or reduce high interest debt, including credit card debt.

An interest-only home loan may also be a good option for people who expect to be in their homes for less than ten years. The average homeowner stays in their home between five and seven years. As mentioned before, home mortgage payments are mostly interest for the first years of the loan. Many homeowners like the option of making interest-only payments and using the extra money as they please - save for college tuition, make home improvements, or buy a much-needed new car.

Common Misconceptions About Interest-Only Loans

While an interest-only loan may be an appealing option to many, there are a number of common misconceptions that you should be aware of prior to making any final decisions.

One common myth is that if you're not paying down your loan's principal, you're not building equity in your home. This is not necessarily true. Homes in the U.S. have been appreciating between 5 and 6% a year. Chances are that even if you're not paying down your principal, you're building equity in your home through appreciation.

One should consult with a qualified mortgage planning professional prior to implementing any mortgage planning strategies. If you are an estate planning, real estate, insurance, tax or financial planning professional receiving this newsletter, please call our office and introduce yourself to us.  We are always seeking to grow our referral network and expose more service professionals to our client base.