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 in terms of 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?

  1. What are the pros and cons of a simple-interest mortgage?

    Learn the difference between a simple interest mortgage and a standard mortgage, along with their relative advantages and ... Read Answer >>
  2. How does the loan-to-value ratio affect my mortgage payments?

    Understand what the loan to value ratio is, how the ratio is calculated and learn how it has an impact on your mortgage payments ... Read Answer >>
Related Articles
  1. Investing

    Who Should Get an Interest-Only Mortgage?

    In the right circumstances, interest-only loans can save you money and help accomplish financial goals; in the wrong circumstances they can be very costly.
  2. Personal Finance

    Interest-Only Mortgages: Home Free Or Homeless?

    These loans can be beneficial, but for many borrowers, they present a financial trap.
  3. Personal Finance

    ARMed And Dangerous

    In a climate of rising interest rates, having an adjustable-rate mortgage can be risky.
  4. Personal Finance

    Make A Risk-Based Mortgage Decision

    Find out how to choose which mortgage style is right for you.
  5. Personal Finance

    Shopping for a mortgage in 2016? Use this tool first.

    As home-buying technology has progressed, the process of finding the best mortgage rates for 2016 can all be done online.
  6. Personal Finance

    Shopping for a mortgage in 2016? Use this tool first.

    As home-buying technology has progressed, the process of finding the best mortgages rates for 2016 can all be done online.
  7. Investing

    Financing Basics For First-Time Homebuyers

    If you're looking to get your first mortgage, there are many financing options available.
  8. Financial Advisor

    Reverse Mortgages: Right for Clients? Not Often

    Reverse mortgages are a legitimate vehicle for folks age 62 and up to tap into the equity in their homes for other uses. Here's what to consider with them.
  9. Personal Finance

    Top 6 Mortgage Mistakes

    These common errors could end in foreclosure.
  10. Investing

    Understanding The Mortgage Payment Structure

    While a mortgageā€™s size and term set the baseline, the interest, taxes and insurance all influence the amount of the monthly payment.
  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. No-Cost Mortgage

    A mortgage refinancing situation in which the lender pays the ...
  5. Qualified Mortgage

    A mortgage in which the lender has analyzed the borrower's ability ...
  6. Mortgage Accelerator

    A type of mortgage loan program popular in the United Kingdom ...
Trading Center