In the last few years, interest only loans have skyrocketed into popularity and borrowers are often confused at whether an interest only loan makes sense over the traditional principal and interest loan. Lets take a look at some of the features of an interest only loan, and weigh both their positives and negatives.
The simple truth is that an interest only loan is not for everyone. Making an interest only payment each month can drastically reduce the money that you "have" to pay towards your mortgage every month, freeing up cash that can be invested in other things like mutual funds, stocks, bonds, etc. The extra cash could also be applied towards the principal of your loan, thereby paying it down quicker and giving you more equity in the home. It can also be used to pay off other debt, school loans, credit cards, etc. This of course has a flipside for those not disciplined with money. If you suddenly have extra cash because your mortgage payment is lower, the temptation is often to spend that money. If you spend that extra money on a monthly basis, your home is not gaining any equity, and your investments are not growing any larger to make money for you down the road.
Interest only loans can also be ideal for those with rental properties, as you can reduce your monthly mortgage payment well below the rental value of the home, thus increasing your monthly income from rents. Interest is also completely tax deductible, meaning that you still take advantage of the interest you have paid all year come tax time. Interest only loans typically also have lower rates, meaning that you aren't overpaying interest every month just to get into the program.
In short, interest only programs can be a great way to pay your home off quicker, have the extra cash to invest or pay off debts, and save you money each month...but they can also be dangerous if not approached with discipline and a plan to use excess funds!
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