If you are a potential home buyer you may be inundated with lots of information, and some of it may be pretty confusing.  If you are looking around for a mortgage loan and have seen the term interest only mortgage loan you may be baffled as to what it means.

An interest only loan is one in which the home owner pays only the interest part of the loan each month, with the principal amount remaining unchanged.   Once the interest only period is completed then the home owner has the option to pay off the principal or change the loan to a conventional type paying off both the interest and principal.  The advantage of the interest only loan is that the payment is much lower than a traditional mortgage payment.

With the conventional type of mortgage there is a fixed payment usually made over a certain period of time – which may not be permanent.   With the interest only loan, there is a designated period where it is interest only, before reverting to principal and a variable interest rate.

The major disadvantage of the interest only mortgage is that when the interest only period is over and it converts to a normal loan then the mortgage payments can be higher than for the conventional type of loan.

So these loans are useful if it is a short term loan – for a limited period.  Be aware that no equity is built up during the interest only period.  When the mortgage payment goes up then there is always the chance of foreclosure if the home owner is not in a position to make the monthly payment.

It is always advisable to consult with a professional before taking out any type of loan.  The mortgage calculator is a useful tool to determine the various financial options that you can consider.