Interest-only loan

Instead of paying principal and interest on your mortgage every month, an interest-only loan lets you defer principal payments during a specified period early in the loan term.  That means your monthly payments will be lower during the interest-only period.* 

Key benefits:

• More borrowing power.  Lower payments may help you qualify for a larger loan.
• Flexibility.  You can make principal payments when you want to build equity, or choose to put money into other investments instead.

Risks you should consider:

• Higher financing cost overall.  The loan amount on which you pay interest won't decrease until you begin paying down the principal.
• Negative equity.  Even without principal payments, you can still build equity if the value of your home increases.  If the value decreases, however, you could owe more than your home is worth, which is problematic if you intend to sell. 

So do the benefits of interest-only loans outweigh the risks?  It all depends on your financial situation and how you want to manage the investment in your home.  Individual needs vary, so you should discuss your options with your financial advisor.

Adjustable-rate mortgage (ARM)

An adjustable-rate mortgage has a low starting rate, so your initial monthly payments on an ARM will be lower than on a fixed-rate loan for the same amount.  And because the amount you can borrow is based partly on how much you can pay each month, your maximum loan amount will probably be higher with an ARM. 

Here's how it works:

• The interest rate starts out lower than the rate on a fixed-rate mortgage, then adjusts regularly based on market indicators.
• The starting rate stays fixed for between three months and 10 years, depending on the ARM product.
• Most ARMs adjust annually, but some adjust on a semi-annual or monthly basis.
• Individual adjustments are capped at a certain amount, and the rate can never exceed the lifetime cap.

Keep in mind that the interest rate and monthly payments can increase during the loan term. You may get the most value from an ARM if you plan to move before the end of the fixed-rate period, or if you're buying at a time when rates are relatively high.

Balloon mortgage

A balloon mortgage has a lower rate and lower monthly payments than a fixed-rate mortgage.  Like an ARM, a balloon loan can help you either save money each month or get a larger loan.  

Monthly payments on a balloon loan are fixed for the five- or seven-year loan term. A final "balloon" payment for the entire remaining balance is due at the end of the term.   

A balloon mortgage is a good option if you:

• Only plan to stay in your home for five to seven years
• Don't expect rates to rise significantly before the loan matures
• Expect to have the money to make the final payment at the balloon date 
• Want predictable monthly payments

Loan Comparison

Loan Program	How It Works	Why Choose It
Interest-only loan	Instead of paying both principal and interest every month, this program lets you make low interest-only payments during a specified period early in the mortgage term.*	Lets you pay down principal when your budget allows, instead of every month Offers more flexibility if you have a fluctuating income
Adjustable-rate mortgage (ARM)	Interest rate is fixed for an initial period, and then adjusts at regular intervals. Has a lower starting rate than a fixed-rate loan, so monthly payments are smaller.	Rate increases are capped to limit your risk
Balloon mortgage	Has low fixed payments during a short repayment term of five or seven years, followed by a final "balloon payment" to pay off the remaining balance.	Has a lower rate than a fixed-rate loan, so monthly payments are smaller