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Because homeowners like the freedom that comes with deciding on how much they’d like to pay monthly against their mortgage, interest-only and deferred-interest mortgages are becoming more popular.

Interest-Only Loans

Interest-only loans give the homeowner the option of only paying the monthly interest. Homeowners also have the option of paying the monthly interest as well as paying towards the principal.

Deferred-Interest Loans

Deferred-interest loans allow the homeowner to pay a portion of the interest payment each month. The unpaid interest is then added to the principal loan balance.

Interest-only payments or deferred-interest payments are often times significantly less than “conventional” interest plus principal payments.

Deciding What’s Best for You

When deciding on how much home you can afford you should think in terms of an interest plus principal payment each month. Don’t overextend yourself if you can only afford the minimum payment on your mortgage. Having a choice to pay only the minimum is different than only being able to afford the minimum.

Interest-only and deferred-interest loans can be very helpful when it comes to money management. But you should be very careful to avoid stretching your budget so thin so that you have to rely on only paying the minimum payment each month.

Helping You Decide

Take a look at the following situations. If they apply to you, these loans might be a good fit:

  • you need cash flow and have a low interest rate
  • you’re paid on commission or depend on tips, and your income fluctuates month-to-month. When commissions are down, make the minimum payment. When you’re doing well for the month, pay the full payment or more
  • you invest the money you don’t put toward your mortgage in something with a higher rate of return
  • you have higher interest debt to pay off
  • you expect to be in your home for less than 10 years
  • you live in an area with appreciating home values

If you’re able to afford the full payment but are interested in the payment flexibility that these types of loans offer, they just might be a fit for your financial goals.

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