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. 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 >>
  3. I've come into a large amount of money. Should I invest it or pay off my mortgage?

    There is no simple answer to this question as it depends on a number of key factors, namely the aspects or criteria of your ... Read Answer >>
  4. 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 >>
  5. 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 >>
  6. 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 >>
Related Articles
  1. Home & Auto

    Choose Your Monthly Mortgage Payments

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

    ARMed And Dangerous

    In a climate of rising interest rates, having an adjustable-rate mortgage can be risky.
  3. Credit & Loans

    Understanding the Mortgage Payment Structure

    We explain the calculation and payment process as well as the amortization schedule of home loans.
  4. Home & Auto

    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. Home & Auto

    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. Credit & Loans

    How Interest Rates Work On A Mortgage

    A step-by-step explanation of the interest calculations, mortgage types, and how the loan is eventually "retired" – which means paid off.
  7. Credit & Loans

    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 ...
  8. Home & Auto

    Financing Basics For First-Time Homebuyers

    If you're looking to get your first mortgage, there are many financing options available.
  9. Home & Auto

    Top 6 Mortgage Mistakes

    These common errors could end in foreclosure.
  10. Home & Auto

    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 ARM

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

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

    In contrast with a normal mortgage, standing mortgages are a ...
  4. No-Cost Mortgage

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

    A type of mortgage loan program popular in the United Kingdom ...
  6. Qualified Mortgage

    A mortgage in which the lender has analyzed the borrower's ability ...
Hot Definitions
  1. Over-The-Counter - OTC

    Over-The-Counter (or OTC) is a security traded in some context other than on a formal exchange such as the NYSE, TSX, AMEX, ...
  2. Quarter - Q1, Q2, Q3, Q4

    A three-month period on a financial calendar that acts as a basis for the reporting of earnings and the paying of dividends.
  3. Weighted Average Cost Of Capital - WACC

    Weighted average cost of capital (WACC) is a calculation of a firm's cost of capital in which each category of capital is ...
  4. Basis Point (BPS)

    A unit that is equal to 1/100th of 1%, and is used to denote the change in a financial instrument. The basis point is commonly ...
  5. Sharing Economy

    An economic model in which individuals are able to borrow or rent assets owned by someone else.
  6. Unlevered Beta

    A type of metric that compares the risk of an unlevered company to the risk of the market. The unlevered beta is the beta ...
Trading Center