When you hunt for a home loan, have you ever thought about an interest-only mortgage? This kind of mortgage doesn’t make you pay on principal at first; you only pay interest on the home loan. An interest-only mortgage is a big difference from a 30-year, fixed rate mortgage, which has you pay principal and interest. If you are thinking about an interest-only loan, below is more information and why demand for these loans is rising.

How Interest-Only Loans Work

Before we get into why interest-only loans are more popular, let’s talk about what an interest-only loan is.

A conventional loan, whether it’s 10, 15, or 30 years, requires you to make fixed payments on principal and interest for the loan’s life. At the start of the loan term, most of the payment is for interest. But as you get toward the end of the loan, you mostly pay on the principal. An interest-only loan lets you make a loan payment only on the interest during the first part of the loan. For instance, you may want to make an interest-only loan payment for the first five years of the loan.

This could be attractive if you are in school and have a lower income, but expect a higher income later. If you will be making a lot of money after you are finished with school, this can work out well for you.

Also, an interest-only loan is what is called a nonconforming home loan. This means the loan isn’t backed by FHA, Fannie Mae, or Freddie Mac. These loans aren’t as popular because they are backed by the US government and major financial organizations, so there aren’t as many of them available.

Why Interest-Only Loans Are Getting More Popular

Even though the loans aren’t as common as conforming loans, they are growing in popularity in 2021 and 2022. Why? Let’s take a look:

Lower Payments

Lower payments are always popular, but why are they more popular at this time? Well, the US economy isn’t doing as well as it could, with higher unemployment, fewer in the workforce, and inflation.

There are many of us who want to keep our out-of-pocket expenses down because of the economic uncertainty. If you aren’t making principal payments on your home loan, you can put that money into savings. Or even better, you can invest the money and make a good return. This will give you more money put away if the economy and inflation get worse.

Preserve Cash

Related to the first point above, paying only interest on your loan allows you to keep more cash in the bank. You can invest your money, or even do home improvements that add to the property value.

Easier To Qualify

You only are making interest payments, so you can qualify with a lower income. If you are having trouble finding work in the pandemic economy, this could be a big benefit.

Qualify For A Larger House

You may want to go for an interest-only mortgage if you’re confident that you will have more money in the future. For example, perhaps you are paying for medical school and know you will be making $200,000 per year in two years.

Or, if you are going to inherit money, you can pay a lower payment now and eventually pay down the mortgage.

House Prices Are Rising

The housing market is booming as inflation and demand for homes is rising. You may be able to buy a home with an interest-only mortgage and rely on the home appreciating in a few years so you can sell it at a big profit.

However, this can be a risky strategy. You should be confident that you are buying the home in a market that is likely to appreciate for the foreseeable future.

Lower Interest Rate

Interest-only mortgages are usually adjustable, so you will have a lower interest rate at first. This can be a big advantage if you don’t plan to stay in the home for longer than the temporary, fixed-rate period.

But you should remember that the interest rate will eventually rise, so it’s important to sell the home before that happens.

Uncertain Economic Environment

With the US economy experiencing inflation it hasn’t seen in decades, there is concern about where the country’s economy will be in the next several years. If you are concerned about finances and the economic uncertainty, it can make sense to conserve cash and put it into investments.

An interest-only loan isn’t for every borrower. There are risks involved. But there’s no doubt that more buyers want to conserve their cash and only make interest payments on their home loans. So, talk to your mortgage lender today about interest-only loans and see if they are a good fit for your needs.