Explaining The Fixed Rate Interest Only Mortgage

Every homeowner would love it if they could have a miniscule mortgage for their dream home.  But usually dream homes are expensive, and that means the mortgage is as well, right?  Not necessarily, if you’re willing to take on an interest only fixed rate mortgage.  With fixed rate interest only mortgages, the consumer pays only the interest on the loan, and therefore their payment is significantly lower than it would be if the loan had both principal and interest.  Usually, interest only mortgage rates are adjustable, meaning that it can go up or down depending on the current average rate, but it is possible to find a fixed rate interest only loan, but usually the rates are bit higher.
 
So how does a fixed rate interest only mortgage differ from a 30 year mortgage, and what are the pros and cons of an interest only loan?  For starters, if you choose a fixed rate interest only loan, about the only similarity to the 30 year mortgage is that they will both have fixed rates.  Those rates will depend on the current average rate and your individual credit score.  From there, the differences begin.  Even if you get a “fixed rate” interest only loan, usually that rate will only be fixed for a certain amount of years (usually five, seven or ten), and then it will adjust from there.  Sometimes, once the rate adjusts, the consumer will also be required to include principal in their payments.  Because of this, their payment could increase dramatically.
 
The biggest pro of an interest only mortgage is the lower payments.  People who may not be making enough money to afford their home now, but expect to greatly increase their income in the next several years could be excellent candidates for an interest only loan.  Interest only mortgages are also good choices for people who don’t intend on holding onto the loan for long.  For example, a person who is flipping the house for a profit, or someone who will be able to pay the loan off after they receive the money from the sale of their old home.
 
Interest only loans are not without some risk, of course.  The same people who are good candidates for these loans could end up stuck with them and their rising payments if their investments do not pay off.  People also should not use interest only loans just to buy more house than they can afford.  It’s one thing to know that your paycheck will increase in the next several years (for example, if you will be graduating from college and expecting a large wage jump), but quite another if you just can’t say no to the fourth bedroom, but you know in five years you’ll still be looking at the same income.
 
In the end, the best candidates for interest only loans will be disciplined investors who are willing to take a risk and are not buying more house than they can handle.  If you don’t fall into this category, your best option is a standard 30 year mortgage with a fixed rate.  You may not have that fourth bedroom, but you will have sanity and peace of mind.