A:

As a general rule, entering a zero principal mortgage, or what is commonly referred to as an "interest-only mortgage," is not in a home buyer's best interest. This is because an interest-only mortgage is a type of mortgage where the borrower only makes regular payments to the lender that cover the interest charged on the money borrowed. As such, the borrower does not make any progress regarding reducing the principal, or the amount of the debt owed.

Even if only a small amount of principal can be paid off with a regular mortgage payment structure, that loan structure is probably better for the average individual than an interest-only loan. This is because the regular repayment of the mortgage principal is a form of "forced savings" for the individual, which can be an easy way to ensure that wealth is accumulated every month.

However, there are some instances where an interest-only loan would be useful for some individuals. If a borrower is just beginning a career where they receive relatively little pay now, but will likely earn significantly more pay in the near future, then it may be useful for them to take an interest-only loan now in order to buy a residence, and then when they earn a higher income they can refinance their mortgage to start paying off the principal. Also, if an individual had access to an exceptional investment opportunity where they could earn large returns on cash they invest, it would, in theory, make good financial sense for them to limit their mortgage payments as much as possible via an interest-only mortgage structure, and then invest the extra money they save each month from the lower mortgage payment into their lucrative investment opportunity.

To learn more about mortgages, check out Interest-Only Mortgages: Home Free Or Homeless?

RELATED FAQS
  1. What are the different types of subprime mortgages?

    Clarify your understanding of subprime mortgages. Learn about the different types, how they work and when they might be beneficial. Read Answer >>
  2. Why does the majority of my mortgage payment start out as interest and gradually ...

    When you make a mortgage payment, the amount paid is a combination of an interest charge and principal repayment. Over the ... Read Answer >>
  3. What is an assumable mortgage?

    The purchase of a home is a very expensive undertaking and usually requires some form of financing to make the purchase possible. ... Read Answer >>
  4. What’s the Difference Between a Mortgage Lender and a Mortgage Servicer?

    Buying a home is an exciting and confusing process. Once the loan is secured, it's important to know who gets the payment: ... Read Answer >>
  5. If My Mortgage Lender Goes Bankrupt, Do I Still Have to Pay My Mortgage?

    Yes, if your mortgage lender goes bankrupt you do still need to pay your mortgage obligation. Here's what usually happens ... Read Answer >>
Related Articles
  1. Personal Finance

    Choose Your Monthly Mortgage Payments

    Exotic mortgages allow you to decide how much to pay. Find out how much they really cost.
  2. Personal Finance

    Would You Save with an Interest-Only Mortgage?

    Sophisticated borrowers might want to consider one of these loans to keep their initial payments low, but they need to fully understand the risks.
  3. Personal Finance

    Understanding the Mortgage Payment Structure

    We explain the calculation and payment process as well as the amortization schedule of home loans.
  4. Personal Finance

    Ways to Be Mortgage-Free Faster

    Getting rid of this debt faster has bigger benefits than you might think.
  5. Personal Finance

    Reduce Interest With An All-In-One Mortgage

    "Offset" mortgages combine a checking account, home-equity loan and mortgage into one account.
  6. Retirement

    Additional Streams of Income for Seniors

    Find out how a reverse mortgage can work in your favor during retirement.
  7. Personal Finance

    Top 6 Mortgage Mistakes

    These common errors could end in foreclosure.
  8. Personal Finance

    5 Reasons To Save For A Big Mortgage Down Payment

    You may be anxious to buy a home, but taking time to save a large down payment has numerous advantages.
  9. Personal Finance

    5 Things You Shouldn't Tell Your Mortgage Broker

    Applying for a mortgage can be a strenuous process. Here are five things to avoid doing when meeting with your mortgage broker.
  10. Personal Finance

    Behind the Scenes of Your Mortgage

    Four major players slice and dice your mortgage in the secondary market.
RELATED TERMS
  1. Interest-Only Mortgage

    A type of mortgage in which the mortgagor is only required to ...
  2. Interest-Only ARM

    An adjustable-rate mortgage (ARM) with an initial interest-only ...
  3. Mortgage

    A debt instrument, secured by the collateral of specified real ...
  4. Standing Mortgage

    In contrast with a normal mortgage, standing mortgages are a ...
  5. Mortgage Rate

    The rate of interest charged on a mortgage. Mortgage rates are ...
  6. Second Mortgage

    A type of subordinate mortgage made while an original mortgage ...
Trading Center