Avenue Mortgage, LLC

NMLS #1115220

Are Interest-Only Mortgages A Smart Strategy or Risky Business?

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When exploring home financing options, many borrowers are intrigued by interest-only mortgages. These loans offer the benefit of lower initial monthly payments, which can seem attractive, especially in high-cost areas or when cash flow is tight. But how exactly do they work, and are they the right fit for your financial goals?

What Is an Interest-Only Mortgage?
An interest-only mortgage allows you to pay just the interest on your loan for a set period, typically 5 to 10 years. During this time, your payments do not reduce the loan’s principal balance. Once that period ends, you begin paying both principal and interest, which often results in significantly higher monthly payments.

For example, on a $400,000 loan with a 6% interest rate, your monthly interest-only payment would be $2,000. But once the interest-only period ends, your payments could jump to over $2,800 depending on the remaining loan term.

Who Might Consider This Strategy?
An interest-only mortgage can be a strategic tool for:

  • High-income earners with variable bonuses who plan to make lump-sum payments toward the principal.
  • Real estate investors who plan to sell or refinance before the interest-only period ends.
  • Homebuyers expecting higher future income, such as professionals early in their careers.
  • Borrowers needing short-term cash flow relief who are confident they’ll be able to pay more later.

The Pros

  • Lower initial payments: This can free up cash for investments, renovations, or other financial goals.
  • Flexibility: You can make additional principal payments if desired, even during the interest-only period.
  • Short-term ownership strategy: If you plan to move or refinance before the repayment period kicks in, this option might make sense.

The Cons

  • No equity built: You won’t reduce your principal unless you make extra payments.
  • Higher payments later: Once the interest-only period ends, your payments can increase significantly.
  • Market risk: If property values drop, you could owe more than your home is worth.
  • Loan complexity: These mortgages often come with adjustable rates, which can be unpredictable.

Should You Choose an Interest-Only Loan?
Like any financial tool, the value of an interest-only mortgage depends on how you use it. If you’re financially disciplined, have a strong long-term plan, and understand the risks, it can be a smart strategy. However, if you’re looking for a long-term solution or might struggle with higher payments down the line, a traditional fixed-rate mortgage may offer more stability.

Want to learn more about which loan type best fits your lifestyle? Let’s connect and run the numbers together.

Can Freelancers Get a Mortgage?

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If you are self-employed or work as a freelancer, you may be wondering whether buying a home is even possible. The good news? It absolutely is, but you will want to be prepared for a few extra steps in the process. Here are five common questions freelancers ask when it comes to getting a mortgage.

  1. What Makes It Harder for Freelancers To Get Approved?
    Freelancers don’t receive W-2s or paystubs, which means documenting income can be more involved. Instead, lenders look at tax returns, bank statements, and sometimes profit-and-loss statements. The key issue is proving your income is stable and ongoing. Irregular or seasonal income patterns can raise concerns for underwriters, so consistency is everything.
  2. How Long Do I Need To Be Freelancing To Qualify?
    Most lenders want to see at least two years of self-employment history. This allows them to average your income and assess its reliability. However, if you’ve been freelancing for less than two years but have previous experience in the same field, you might still qualify. In some cases, alternative mortgage programs allow qualification with just one year of income, though they often require higher down payments or interest rates.
  3. Do I Need To Earn More Than a W-2 Employee?
    Yes. That’s because your qualifying income is calculated after expenses are deducted. If you gross $150,000 annually but write off $75,000 in expenses, your qualifying income is $75,000. Meanwhile, a W-2 employee earning $100,000 would typically be able to use the full amount to qualify. So, the cleaner your books, and the fewer deductions you take, the better your numbers will look on a mortgage application.
  4. Does Already Owning a Home Help My Chances?
    Absolutely. Having a track record of on-time mortgage payments shows lenders that you’re capable of managing homeownership, even with freelance income. That said, lenders will still require updated documentation to prove your income can support a new or larger loan.
  5. What Can I Do To Boost My Approval Odds?
    Here are a few practical steps to put yourself in a stronger position:
    • Keep your business and personal finances separate with different bank accounts.
    • Build cash reserves for a down payment and emergency savings.
    • Pay down existing debts to lower your debt-to-income ratio.
    • Work with a mortgage professional who understands the self-employed borrower process.
    • Be honest on your tax returns. Don’t inflate numbers just to qualify, that is a red flag for both lenders and the IRS.

While the road to homeownership as a freelancer may involve a few more hurdles, with the right planning and guidance, it is definitely within reach.

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100 Independence Place, Ste. 308
Tyler, TX 75703