Interest Only Mortgages are loans where the scheduled monthly payments give the option of only having to pay the due interest with out having to contribute to the reduction of principal. Not having to pay into the principal provides a lower monthly payment and gives you the greatest taxation benefit. However, note that if you were to use the Interest Only option every month your loan balance will not go down...so if you choose this option you should fit into one of the following categories:


1. Inconsistent Income - If your income varies monthly then having the ability to pay less on any given payment by exercising the Interest Only Option can be highly beneficial.

2. Create Cash Flow - Having a lower monthly payment may be just the thing some people need to free up cash for investment purposes. When you consider that Stocks average over 10% Annually when averaged over they years, it makes more financial sense for some people to invest in such stocks rather than spend that same money paying down a 6.5% mortgage. Over 5 to 10 years the savings can be much greater than what you would have paid into principal. It could free cash for other investments, too, such as other real estate purchases. Or perhaps you have higher interest rate credit cards that could be paid down while using the Interest Only Option.

3. Purchase A Nicer Home - Having lower payments can allow you to buy a more expensive home. This is a very logical thing to do when you are buying a 'Starter Home' or are otherwise certain that you would outgrow a lesser home in the next 2 or 3 years. This is because you would incur Loan Costs and Real Estate Commissions if you were to sell your home only in order to buy the nicer home---the home that would have been affordable had you utilized an Interest Only Morgage. So these future transaction costs can be avoided by using an Interest Only mortgage right now.