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When you are shopping for a mortgage, interest only loans can be very enticing. Interest only loans will always have a lower payment than regular fixed mortgages and that is why many people consider them useful. Because of the recent downturn in the housing market, many believe that interest only mortgages are not a good idea and borrowers are scared away from these loans. However, there are a few situations when an interest only mortgage makes sense. Here are a few of the more common scenarios where it could be beneficial to you:
1. Self Employed
Being self employed means that you have to get used to a lot of new things. One of those things is usually getting paid sporadically. Usually, you do not have a consistent schedule or payments coming in. Some months you have plenty of money and other months you barely scrape by. Because of the fluctuations in income, an interest only mortgage can be a very desirable thing for the self-employed person or entrepreneur.
When you have a good month, you can pay the minimum payment and a little extra to cover principal. When you have a bad month, all you have to pay is the interest. This gives you a level of flexibility that you cannot get from any other type of mortgage product. Being able to pay just the interest on the loan gives you a smaller monthly payment when you absolutely have to have it. Otherwise, you can make a bigger payment and pay down some of the principal.
2. Short Term Plans
Another instance when it can be beneficial to have an interest only mortgage is when you are not planning on being in the house you purchase very long. If you are going to sell in a few years, it really does not matter if you have an interest only mortgage. You know that you are never going to make it to the balloon payment at the end of the term and therefore, you do not have to worry about it. When you sell the property, you can pay off the mortgage and the balloon payment will become irrelevant.
In the short term, you can enjoy not having a regular mortgage payment. You can just pay the interest on the loan and still get to enjoy the benefits of owning a home. Since you get to deduct all the mortgage interest that you pay throughout the year, your entire mortgage payment can be deducted from your taxes. This gives you a big benefit when compared to renting a house.
3. Refinancing in the Future
If you know that you are going to be refinancing in the future, then an interest only mortgage might be in your best loan option. In the short term, you can take advantage of the low monthly payments. Then when you are ready to refinance the mortgage, you can pay off the loan and not have to worry about the balloon payment anymore.
