You’re likely already very familiar with fixed or adjustable rate mortgages and how these two common mortgages differ in how they work and the options they present. One mortgage that may be lesser known to many buyers and is a little more complicated is an interest-only (IO) mortgage.
With an IO mortgage, you’ll first need to have an understanding of how your payments will differ from the period of interest only and the fully amortized period, otherwise known as the period when the principal and the interest are both paid. You’ll also need to take into account how the interest on the loan may change, as IO loans also function as adjustable-rate mortgages.
An interest-only loan may be a good option for a recent graduate who expects his or her income to increase considerably within the next couple of years, in time to make the higher principal and interest payments once the loan’s interest-only period is over. This may also be a good option if your income fluctuates and you want to have the option to pay more when your income is higher or less when it’s not quite as high.
If your interest in an IO loan is to purchase a larger home than what you can actually afford in hopes of being able to eventually afford it or refinance it, it may be risky. With these types of loans you must qualify to be able to make the higher principal and interest payments later on, not just the interest only payments.
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