Ask the Experts: Should I consider an interest-only mortgage?

Ask the Experts: Should I consider an interest-only mortgage?

An interest-only mortgage lets you make monthly payments consisting of interest only for a specified number of years before you begin to pay off the principal balance. As a result, your payments during the interest-only period would be lower than conventional mortgage payments for the same principal amount. However, when the interest-only period ends, your payments will increase; in fact, they’ll become higher than the conventional mortgage payments would have been.

You may find this type of mortgage attractive for one of two reasons. By making interest-only payments equal to what your conventional mortgage payments would have been, you could potentially borrow more principal and buy a more expensive home. Alternatively, you could borrow the principal amount you originally intended to borrow and use your monthly savings on the early payments for other things. Either way, because the early payments are entirely interest, you may get a larger tax deduction.

But there are drawbacks. Unless the market value of your property increases, you won’t be building any equity during the interest-only period. If you sell the property before you reduce the principal balance, the net proceeds from the sale might be less than what you owe on the mortgage. If you don’t sell, you’ll have to make substantially higher monthly payments once the interest-only period is over. Further, you’ll pay more total interest for this type of mortgage than you would for a conventional mortgage.