In the traditional mortgage loan market, you pay a part of your mortgage, and the monthly interest with each monthly mortgage payment you submit. This was how all mortgages were until now. Some banks have now introduced a new kind of loan to attract more borrowers by keeping the monthly mortgage as low as possible by only paying the interest.

This means that if you choose an interest only option, every month you pay your mortgage, the loan balance stays just the same; it never gets lower. Of course, most lenders will allow you to pay more than the minimum interest payment any time you want, but that defeats the purpose of the loan, which is to keep the monthly payment as low as possible.

There may have been some rationale to this type of loan when property prices were increasing dramatically, since the homeowner would be guaranteed some equity due to the increased home price. The combination of increased equity because of market increases, and the paydown of the principle gave most borrowers some residual value in the home when sold.

However, changes in the real estate market mean that this type of increased value is no longer guaranteed, so any equity has to be built by paying off the principle. There are cases where interest only loans are a good solution. But these cases should only be temporary situations.

Perhaps there is a situation where one partner is not working or only working part time while he completes school. This is a temporary situation, and when the second partner finishes his studies and starts a job, the loan should be changed to interest plus equity or additional payments should be made to lower the mortgage.

Another example would be where the homeowner has income that varies greatly from month to month. An example of this may be someone who performed project work and was only paid at the end of each project. While the project is underway, it is best to keep payments as low as possible, a need the interest only loan could meet, and then when income is realized, higher payments can be made.

In any of these instances, it is dangerous to not increase the payment at some point in so as to bring the principle balance down. As mentioned, with “old fashioned” mortgages, the loan was paid down eventually because part of the monthly mortgage went towards principal, so the owner had some equity even if the value of the home did not go up. If no equity has been paid off, the owner will have to find additional money to pay off the mortgage if home values have not sufficiently improved.

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