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 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?


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. 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 >>
  3. 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 >>
  4. 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. Sorry to disappoint, but there ... Read Answer >>
  5. What are the requirements to apply for a reverse mortgage loan?

    For homeowners of a certain age who wish to stay in their homes but are finding it costly, a reverse mortgage could be the ... Read Answer >>
  6. Why does the loan-to-value ratio matter?

    Learn how the loan-to-value (LTV) ratio is calculated, and why this metric is important to lenders when evaluating a home ... Read Answer >>
Related Articles
  1. Personal Finance

    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. Managing Wealth

    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. Investing

    Understanding the Mortgage Payment Structure

    We explain the calculation and payment process as well as the amortization schedule of home loans.
  4. 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.
  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 mortgages rates for 2016 can all be done online.
  6. 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.
  7. Retirement

    Additional Streams of Income for Seniors

    Find out how a reverse mortgage can work in your favor during retirement.
  8. Investing

    Be Mortgage-Free Faster

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

    Mortgage Basics: Costs

    By Lisa SmithPeople generally think about a mortgage in terms of the monthly payment. While that payment represents the amount of money needed each month to cover the debt on the property, the ...
  10. Personal Finance

    Understanding The Mortgage Payment Structure

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

    A mortgage refinancing situation in which the lender pays the ...
  6. Mortgage Accelerator

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