EchoBay Expert: I found a home I want to purchase but I can't afford the monthly mortgage payments of a traditional 30 yr. loan. Should I get an interest only loan which has much lower monthly payments?
Loyal Reader: For the average person, an interest only loan provides an avenue to home ownership when you cannot afford the traditional payments of a home. However, when you are considering this type of financing, it could be a short-term fix.
Obviously, with an interest only loan, you are not making any reductions to the principal. When you sell this house, you will owe the same amount you did when you originally took out your loan assuming you can sell it for at least what you paid for it.
If an interest only loan is the only way you can afford the payments, you should consider looking for a less expensive house. While it can be great when tax time rolls around because of the deduction, you are really no closer to home ownership than you were when you first took out your mortgage loan.
For certain borrowers, there can be advantages to interest only loans. If you have a job where the majority of your income is based on commissions or you expect to earn a large bonus at year-end, this type of loan can make sense.
With this type of arrangement, you can use your extra income to pay down principal. In doing this, you may pay off your home faster than you would with a traditional mortgage loan. Also, if you have solid investments for the money you will be saving each month, this could also be a way to have a home and a portfolio.