If you are in the market for a new loan or a refinance of a current loan then you know that the types of loans that the mortgage brokers offer in the marketplace has grown substantially in the last 20 years. There are so many different types of loans out there it can be overwhelming to decide which one is right for you.

Of all the mortgage options out there, and I tried many, I must say interest only loans are my favorite and I will tell you why I think so. Let me start first by saying interest only loans are not for everybody. You need a certain fiscal responsibility to be able to handle interest only loans. You also need to have a desire to pay down the loan. One of the keys to taking advantage of an interest only loan is to always pay more than just the interest payment.

Here are some of the reasons that I like the interest only mortgage:

• The interest only loan would benefit you if work in a field where your pay fluctuates, such as commission based jobs or small business owners, or if you have high unexpected costs from time to time. The reason for this is the payments required each month is less than your standard amortizing loan. It is less because you are only paying the interest and not any principal. This would allow you to only pay the minimum when you come across a month where you are short on funds. When you come across a month during which you have excess funds you can pay down the mortgage and “catch up” from the previous months.
• You decide the timetable to pay down your loan. Loans are amortized over 30 years because it maximizes the interest earned by the bank. For example:
  • If take out a loan for $100,000 at 6% interest and pay it back over 30 years your payment will be $600 a month. Over the 30 years you will have spent $115,838 in interest to pay back that $100,000 loan. That means you spent $215,838 to pay back a $100,000 loan. Quite a racket the bank has going.
  • If you take the same loan out over 15 years. Your payment would be $844 a month. Over the 15 years you would spend $51,894 dollars in interest. This would amount to a saving of $63,944. Not too shabby.

  You have probably heard that spiel before and you can prepay any type of loan that allows for it (make sure you never get a loan that does have a prepayment penalty). You do not have to be so dramatic in the payback. The only point I am trying to stress here is that every little bit of prepayment on your loan helps. To see why I think this above point is so much better in an interest only loan see my next point.

• If you are a person that needs immediate gratification. A loan really is not the type of thing for you. They get paid off slow. Real slow, possibly a 1/3 of your life slow. An interest only loan does however have something for those of us that are in desperate need of immediate gratification. Let’s take two loans, as we did in our example above, for $100,000.
  • One is an amortizing loan requiring a payment of $600 a month and the other is an interest only loan requiring a payment of $500 a month. Of course the interest only payment is lower because it does not require principal. Let’s say that for the first month we overpay the amount the bank is requiring, prepaying the loan as I talked about in my last point and pay $2,000 toward both loans. This would bring the loan balance on both the loans to the same amount $98,500. When you get your next mortgage bill from the bank the payment for the amortizing loan will be $600. Just like it was the month before. You prepaid the loan, but nothing has changed. Less payments over the 30 year term, but we are looking for immediate gratification. No gratification there. On the other hand when you get the bill from your interest only loan you will see that you payment is now only $492.50 down from $500. A savings of $7.50. There is your immediate gratification.

  Every month when you overpay you mortgage bill you will see that your next month’s payment goes is less. This is why I believe interest only loans are the best motivator for paying down you mortgage early and saving you money.

  For a better illustration see the graph below.

I have also included a file for download to keep track of your interest only mortgage. This spreadsheet helps you determine how much you will save each month by overpaying the mortgage and also how much you saved overall.

Good luck! I hope this article helps.

Interest Only Loan Payment Calculator