Is an interest only loan a good idea when buying a house?

Should you be paying interest only when you buy your first home? Well there are different answers to that question. It depends on the situation of the buyer and the current housing market in that area.

Interest only loans

To begin with, when you are paying an interest only loan you are not paying any principal down at all. So if you obtained 100% financing then you are not building equity in the home by paying only interest payments. However the interest only payment might have been the only way for you to become qualified to purchase the home in the first place.

Current housing market

The second variable to consider is the current housing market. Are the values in your area appreciating faster than others? Did you buy at a discount and with a few minor improvements will the value increase? In this situation you are building equity simply from the market. So you don't mind that the principal isn't being paid down since your home's value is appreciating.

Selling timeframe

Another scenario where an interest only payment would benefit you is if you intend to sell within a few years. If the current property is only a temporary home then an interest only payment will save you each month. In addition the principal payment isn't large in the first few years of a fully amortizing mortgage payment. In this situation you are anticipating the property appreciating over those few years so you can realize a profit over the original loan amount since it will be the same size.

In conclusion, you shouldn't jump into an interest only mortgage without weighing all the facts related to your situation. We recommend you contact one of our trusted online lenders to review your entire situation and make sure you are obtaining the right mortgage for you.

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