How to Get an Interest-only Mortgage

The saying goes that the two happiest times of your life—getting married and buying your first home—are also the most stressful. When you follow these steps to obtain an interest-only mortgage, you may find your home-buying experience almost as tranquil as your honeymoon.

Instructions

Difficulty: Easy

Deciding if an Interest-Only Loan is For You

1. Determine if you're disciplined enough to make an additional payment to principal even when you aren’t obligated.
2. Do you anticipate a family in the foreseeable future and want to skip the cost of “trading up” from an affordable starter house to your family home now?
3. Are you anticipating a significant income increase and are you certain it will materialize?
4. Do you have little money to put down on the real estate but feel confident that the anticipated monthly payment would be manageable?
5. If you answered “YES” to these, then an interest-only loan may be a good choice.
   

Qualifying

6. Visit an online interest-free mortgage calculator like the one listed below under Resources. It’s free to use and contains no pesky pop-ups.
7. Contact your bank or credit union. As an established customer, you may qualify for preferential treatment or rates. It never hurts to ask.
8. Visit an online mortgage broker to find out if you qualify for a better deal outside of your bank. BankRate is a great place to start but there are many brokers and reference sites to choose from. Use a search engine to find one you feel is qualified.
9. Practice full disclosure and be honest about your financial situation including actual debt, income (not anticipated) and available capital for a down payment.

Tips & Warnings

• Lenders are less likely to offer a low interest-only mortgage rate to those with questionable credit. The reason is that at any point in the loan, the balance will always be higher on an interest-only loan compared to principal-and-interest loans. Interest-only is a bigger risk for them.
• Don’t be deceived by a lower interest-only adjustable rate mortgage (ARM) compared to a fixed-rate mortgage. Fixed rates may be higher at the onset of the loan, but the ARMs will adjust up, making your interest-only payments rise as well.
• Ignore the myth that interest-only loans are immune from mortgage insurance. Because an interest-only loan is actually riskier than most other loan types, this is the time the lender is most likely to require insurance.
• Don’t buy into the misconception that it is impossible or costly to amortize an interest-only loan. While it may not be as simple as a fixed-rate mortgage amortization schedule, it can and is done everyday.
• Interest-only isn’t the only low-cost loan available. Consider other loan types like an equity loan (if your home is worth more than you’re paying for it) to pay off some of the principal on a fixed-rate loan. Look into an ARM if you don’t plan on staying in the house for more than 7 years.