Is an Interest-Only Mortgage Ever a Good Idea?
Survivors of the Great Recession may remember that interest-only mortgages were a major factor in causing the housing crash and the ensuing economic train wreck. Yet in the last few years, these mortgages have reappeared as an option for some homebuyers. Should you consider getting an interest-only mortgage?
With a traditional, fixed-rate mortgage, you make a set payment over a set period of time, and the payment is applied to both the principal (the amount you actually borrowed from the mortgage lender) and interest (the profit the mortgage lender makes in exchange for lending you the money). Interest-only mortgages are structured in a totally different way: For the first part of the repayment term, often 10 years, you're only required to pay the interest that's due on the loan at a (usually low) fixed rate. Because you're not paying down the principal, your loan balance stays exactly the same during this time. When the interest-only period is over, your payment will reset to a principal-plus-interest payment, typically with a variable interest rate that may be substantially different from the fixed rate you paid at first.
Image source: Getty Images.
Source: Fool.com
