What are Interest Only Mortgages?
Interest only mortgages are loans for which the borrower need only pay the interest for a particular term, rather than principal and interest. These types of loans are becoming more popular as the cost of housing skyrockets in some areas of the US, but there are inherent dangers associated with them. Interest only mortgages are appealing to borrowers because they allow them to purchase a more expensive house than they might otherwise be able to afford. The ‘principal free’ term of the mortgage can be five to seven years or longer. If you are fairly confident that house prices are going to remain high — a dangerous assumption to make — and you are not planning to stay in your house for more than a few years, an interest only mortgage might save you money. Formerly, interest only mortgages were the province of the very rich, who would take the money they would ordinarily be paying in principal on their loan, invest it in ways that would make more income that they could apply to the pri
Interest only mortgages are loans that have no principle reduction. The payments you make are only enough to cover the interest owed on the loan. There is no reduction in the loan balance. If you borrow $375,000.00 on a five-year fixed interest-rate mortgage and make only the interest payments, at the end of the five-year term of the loan you will still owe the $375,000.00 that you borrowed.
Mortgage repayments are traditionally comprised of capital and interest repayments. An interest-only loan means you just pay the interest back to the lender. Traditionally, you would be required to show that you had set up an investment vehicle such as an ISA or pension in which you would save for the capital. Most lenders today offer an interest-only loan without this proof. Interest Only Mortgages – Advantages Paying just the interest will reduce your monthly repayments considerably, giving you extra cash. Ideally you should also have some sort of savings vehicle set up to repay the loan as well as the interest. Can be a way of making the first step affordable in terms of mortgage payments. Interest Only Mortgages – Disadvantages When you do switch to a repayment mortgage, the rise in monthly payments could come as a shock – especially if you make overpayments to catch up with the previous shortfall in capital. If you continue to pay just the interest, you will not own the property a
