Interest Only Mortgages - Know the Basics

Mortgages come in all shapes and sizes. Some mortgages offer you 100 percent financing, while others require that you put down 20 percent of the home's value. If you are looking for a mortgage that will allow you to qualify for a larger loan, offer you a low monthly payment and allow you payment flexibility, then you may want to consider an interest only mortgage.

What Are Interest Only Mortgages?

An interest only mortgage is a financial product that offers homebuyers two payment options. First, they can pay only the interest portion of their mortgage. The second option is for homeowners to pay both the interest and the principal for their mortgage. After the interest free period has expired, usually between 5 and 10 years, the loan balance will be re-amortized for the remaining 20 or 25 years of the loan. If the borrower had paid down the balance during the interest only period, then the remaining amortization will be based on a lower initial balance. However, if the borrower only paid the interest during the interest only period of the loan, then the loan will be amortized for the full value of the original loan. If borrowers can't afford the higher payment rates created by the re-amortization they can always refinance their home.

Should You Apply for an Interest Only Mortgage?

There are many different types of borrowers that can benefit from an interest only mortgage. First of all, an interest only mortgage is a great option for people who are self employed, or who have inconsistent monthly incomes. When borrowers have a slow month they have the option to pay just the interest portion of their home loan. On the other hand, if they have a good month, they have the option to pay both the interest and a portion of the loan's principal.

Interest only mortgages are also a good option for people who expect to be making more money in five to ten years then they are currently making. This allows them to qualify for, and afford, a home loan while they are making less money, with the understanding that they will be paying off the principal of the loan when their income increases in five to ten years. This is a great option for both first time homeowners and for younger homebuyers.

People who are interested in building their wealth via real estate investments may also want to take advantage of the perks of interest only mortgages. This is a great option for people who like to flip real estate, and for people who are interested in buying investment properties. Investors may also want to use their mortgage savings as investment capital for more lucrative money making opportunities.

How Do You Qualify for an Interest Only Mortgage?

While each lender will have their own set of requirements for an interest only mortgage, most lenders expect borrows to meet the same basic requirements. The first basic requirement is that borrowers have a good credit rating. While each lender will have their own definition of what a good credit score is, borrowers will generally need a credit score of at least 700 to qualify for this type of mortgage. In addition to a good credit rating, most lenders will also expect you to make a down payment that is worth at least 20 percent of the home's value. If you don't have 20 percent to put down, you are allowed to use a second mortgage to cover your down payment.

Where Can You Find Interest Only Mortgages? 

Most lenders today will offer interest only mortgages. However, you will most likely need to ask your lender if they offer this type of mortgage product. If your local banker does not offer an interest only mortgage, then you may need to talk with a mortgage broker. Mortgage brokers have access to a variety of mortgage programs including interest only mortgages, and they will be able to help you find a loan program that will work best for your particular financial situation. Mortgage brokers are also a great resource for second mortgages and for 100 percent financing options.