Timeline

• If you obtain an interest-only mortgage on your home, you do not have to submit any payments toward the principal balance on your mortgage for a period of between five and 10 years. During this time, you pay only interest to your mortgage company, and the balance of your mortgage will not decrease unless you opt to make additional payments toward the balance of your mortgage. However, it does not eliminate the need for mortgage insurance, and could, in fact, extend the number of years you must pay mortgage insurance.
  
  

Function

• Mortgage insurance protects your lender in case you default on your loan. In most cases, your lender requires you to pay mortgage insurance premiums if you fail to make a down payment on your home of at least 20 percent of the purchase price. You typically pay these premiums until you accumulate at least 20 percent equity in your home. Lenders regard low down payments as high-risk loans. If you default on your payments, mortgage insurance protects your lender from financial losses.
  
  

Considerations

• Though mortgage insurance is an unwanted expense for many, it is tax-deductible on your federal income taxes. Additionally, your mortgage company can pay your monthly premiums for you out of an escrow account that you fund with monthly escrow contributions. However, if you wish to avoid paying the insurance, you must wait to purchase your home until you have at least a 20 percent down payment. If you find a lender who will allow you to forgo paying mortgage insurance for a low-down payment loan, you will likely make up for the difference by paying a higher interest rate.
  
  

Warning

• Interest-only home loans cost much more over the life of the loan than fixed-rate loans and adjustable-rate options without an interest-only option. Additionally, interest-only loans typically carry higher interest rates than other mortgages. If the addition of mortgage insurance premiums to your monthly payment makes your mortgage liabilities unaffordable, you should avoid choosing an interest-only loan to temporarily lower your payment. Not only will you delay building equity in your property, but eventually your loan payments will adjust and you will be obligated to make much higher monthly payments. Consider purchasing a cheaper home or waiting until you can afford a 20 percent down payment.