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?

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