Which is better: interest-only or traditional?

This tool compares a traditional, fixed rate mortgage loan to an interest-only loan. The difference between the two is shown in terms of overall cost difference for the years you expect to be paying the mortgage, as well as a comparison of the monthly payments. Monthly payments for the interest-only loan are shown both during and after the initial, interest-only period.

An interest-only loan might be advantageous if the borrower has an uneven stream of income (commissions), if the borrower expects to have an increase in income before the payments increase, or if the borrower intends to sell the house in a short time and home values are increasing. Also, an interest-only loan allows someone to qualify for a more expensive home.

On the other hand, the actual amount of interest paid over the term of the loan is higher with an interest-only loan and during a period of stagnant or falling real estate prices, it is easy to get into a position where the value of the property is less than the loan balance. In cases where the interest-only loan is also an adjustable rate mortgage, the payment increase at the end of the interest-only period can be dramatic.