05 Feb 2022

How Does an Interest-Only Mortgage Work?

Interest-Only Mortgage

An interest-only mortgage poses several advantages for some homebuyers and investors. The home loan also has some disadvantages for others. We outline the stages of this mortgage option.

Interest-Only Period. The interest-only period lasts five or ten years. During these years, the homebuyer or investor must repay the interest that accrues. They do not need to make any repayments toward the principal amount. This drops the repayment amount.

For example, a $500,000 interest-only mortgage with a 3% interest rate over 30 incurs a monthly repayment of $1,250. Homebuyers who opt for a different home loan such as a low doc loan incur different monthly repayments. Under the same circumstances for a low doc loan, the monthly repayment becomes $2,108. 

Interest-Only Period Expiration. When the interest-only period expires, the monthly repayments will jump. However, a cap in the interest rate often exists. In some cases, it can only increase 2% annually. Plus, the homebuyer or investor begins repayment of the interest rate and the principal. 

Paying Off the Home Loan. For investors, this mortgage option keeps the initial costs of acquiring a new property low. Their goal is to find a tenant or new buyer before the interest-only period expires. For homebuyers, it gets their foot into the homeownership door. Thereafter, Mortgage House loan specialists can offer alternative solutions to keep repayments manageable. 

Our Mortgage House mortgage repayment calculator is at your disposal too.

Interest-Only Mortgage Conclusion

An interest-only mortgage has stages. To navigate successfully through the states, it’s important to keep an eye on the interest-only period expiration date. Contact our Mortgage House loan specialists today.

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