Whether you are buying a house or refinancing your mortgage, this information can help you decide if an interest-only mortgage or a payment option mortgage is right for you. These mortgages can be complicated. If you do not understand how they work, you should not sign any loan contracts, and you might want to consider other types of loans.
Interest Only Mortgages allow you to pay only the interest on the money you borrowed for the first few years of the mortgage (the “interest-only period”).
If you pay only the amount due, then at the end of the interest-only period:
- You still owe the original amount you borrowed.
- Your monthly payment will increase because you must pay back the principal as well as interest.
- Your payment could increase even more if you have an adjustable rate mortgage (“ARM”) and the interest rate increases.
Home Equity – If you make interest-only payments, your payments are not building home equity. This may make it harder to refinance your mortgage or obtain funds from selling or refinancing your home.