• Advantages and disadvantages of an interest only loansign. loan sale image by L. Shat from Fotolia.com
  
  Buying a home is the largest purchase most people will ever make in their lifetimes. Because of this, you want to make the best decision regarding the type of loan to take out. A huge variety of options are available, including interest-only loans. Before you decide whether an interest-only loan is right for you, you should be aware of the advantages and disadvantages.
  
  

Initial Saving

• With interest-only loans you pay only interest for the first years of the loan--no principle, with the length established in the mortgage agreement. This lowers your initial monthly payments considerably. For example, if you take out a $200,000 loan with a traditional mortgage and your interest rate is 4.75 percent, your monthly mortgage payment would be about $1050, which includes both interest and principle costs. If you take a loan for the same amount and interest rate, but it is an interest-only loan, your monthly payment would be about $800, a savings of about $250 per month. You do not pay anything on the principle.
  
  

Tax-deductible

• With a traditional loan, the interest is tax-deductible, but what you pay on the principle is not. With an interest-only loan, your entire mortgage payment is tax-deductible.
  
  

Sporadic Income

• Interest-only loans may be a good fit for people whose income is inconsistent because its primary source is commissions or bonus payments. These people would have the option of paying only interest in months in which they do not receive any income, but they can then pay more than the amount due when they do get paid. This payment flexibility is a big advantage with interest-only loans.
  
  

Future Value

• Interest-only loans work when the value of the home goes up over the course of the loan. If the value goes down, you have a problem; because when you refinance, you will have to come up with the difference between the value of the home and the amount of the loan. In some cases, this could be a significant amount of money. This is why many people recently have lost their homes due to foreclosure.
  
  

Adjustable Interest Rates

• Typically, with these types of loans the interest rate is set below the market rate. In most cases, this rate will eventually adjust to a higher level than the going fixed rate. If rates do go up significantly, it may be difficult to make monthly mortgage payments, and you could lose the home to foreclosure.