An Interest only mortgage is exactly what it sounds like — a type of mortgage that allows a buyer to pay only the interest (rather than the principle and interest) due on the mortgage each month. This results in lower monthly payments, but doesn’t build any equity. In an appreciating real estate market or when the buyer intends to remain in the house for less than five to seven years, an interest-only mortgage can make good financial sense.
However, in a stagnant real estate market or if the house can’t be sold and there is little to no equity in the house, then an interest-only mortgage can become a burden. This is especially true after initial teaser rates reset.
If you have an interest-only mortgage loan, it might be a good idea to find a lender that will help you shop and compare different types of loans, especially if you are a veteran or eligible for other special types of home loans.
Use this checklist to see if refinancing or shopping for other types of home loans may be beneficial in your situation:
- I intend to remain in my home longer than expected.
- I have little to no equity.
- My initial rates are due to reset and I will have difficulty repaying the loan at the higher rate.
- I am eligible for a lower fixed rate loan and intend to remain in the house.