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Interest Only Mortgage Loans

Definition

An interest only mortgage loan is a mortgage loan that allows you to make payments on just the loan's interest (instead of both the principal and the interest) for a fixed period of time. Because you're only paying on the loan's interest, interest only mortgage loans are typically the cheapest way to get into a home, or the best way to afford the most expensive home.

The interest only period of an interest only mortgage loan is typically 1, 3, 5, 7, 10 or 15 years. After this period is over the loan's principal and interest are amortized for the rest of the loan's life, so monthly payments will go towards both principal and interest (and will be higher than they were during the loan's interest only period).

Key Points

• During the initial interest only period, monthly payments go only towards paying off the loan's interest (i.e. after five years of interest only payments for a $150,000.00 mortgage, you would still owe $150,000.00).

• Because the initial payments for an interest only mortgage loan are just paying off interest, they are typically lower than any type of mortgage loan that is paying off both principal and interest (i.e. fixed rate, adjustable rate, etc.).

• Once the interest only period of an interest only mortgage loan is over, then the loan's principal and interest will be amortized over the rest of the loan's life and monthly payments will go toward both principal and interest. Since the payments will be going towards both principal and interest at this point, they will be higher than they were initially.

  Note: In addition to standard interest only mortgage programs, there are many interest only programs for unique situations. For instance, there are interest only programs for first time homebuyers, interest only mortgage programs that don't require a down payment, interest only mortgage programs for bad credit, etc. For more information, go to the Loan Programs main page and click one of the items in the Loan Types list.

Pros

• During the initial interest only period of an interest only mortgage loan, monthly payments are typically lower than monthly payments for any type of loan whose payments are based on both principal and interest.

• Buyers can qualify for an interest only mortgage loan based on the interest only payments, so they can typically qualify for a signficantly higher amount with an interest only mortgage loan than they could with a fixed or adjustable rate mortgage loan.

• You can choose to pay down the principal of an interest only mortgage loan at any time by adding an additional amount to the loan's regular interest only payments. Any amount above the interest only payment will be applied directly to the loan's principal balance.

Cons

• During the initial interest only period of an interest only mortgage loan, monthly payments go only towards paying off the loan's interest (i.e. after five years of interest only payments for a $150,000.00 interest only mortgage loan, you would still owe $150,000.00).

• Once the initial interest only period is over, an interest only mortgage loan's monthly payments will be higher than other types of loans because the full loan amount will need to be paid off over the rest of the loan's life.

Summary

Interest only mortgage loans allow you to make monthly payments on just the loan's interest for a fixed period of time. Once this interest only period is over, the loan's principal and interest are amortized over the remainder of the loan's life. The monthly payments then go towards both principal and interest and so are higher than they were during the loan's interest only period.

Interest only mortgage loans have lower initial payments than other types of loans whose payments go towards both principal and interest, so they can allow people to qualify for larger mortgages or to get into a mortgage with a lower initial payment than other types of loans. Finally, interest only mortgage loans are available for many unique situations: there are interest only mortgage loans for first time home buyers, interest only mortgage loans for bad credit, interest only mortgage loans that don't require a down payment, etc.

If you're interested in applying for an interest only mortgage loan with Arizona Mortgage Group, simply complete our Quick Application. One of our loan originators will then call you within 1 business day to answer any questions you have and get you started.