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Principal Facts about Interest-Only Mortgages

Interest-only mortgages are those where the borrower is required to pay only the interest on the loan for a fixed period of time, though the borrower has the freedom to pay more than the interest. This fixed period usually lasts around 5-10 years. However, if the borrower pays only the interest during the initial period, after the interest-only period ends, the borrower has to pay the entire principal along with the interest within the remaining mortgage term.

Consider the example of a certain amount borrowed at a fixed rate of 6% for 30 years. During the initial interest-only period of say 5 years, the borrower is required only to pay the 6% interest amount each month. But after this ends, the monthly payments increase to include the amortized principal and same interest, spread over the remaining 25 years.

Comparing this with the normal amortized plan, where the monthly loan amount is broken into fixed monthly payments with a fixed interest rate for the entire mortgage term, the total amount paid in an interest-only plan is comes out to be higher, as also the monthly payments after the interest-only period ends.

Risks Involved

The various risks involved with interest only-mortgages include the following:


  • Since the monthly payments in interest-only mortgage plans increase after the initial period, this means one is betting on an increase in income by that amount to be able to afford the increased installments. However, if the income does not increase, the monthly payments might seem to be a shocking increase.
  • If one is planning to move out of the newly-purchased home after the interest-only period ends, it is again a bet on an increase in the property value in the market which can be used to pay the loan. However, if the value does not increase or worse still, if it decreases, one can be quite deeply in debt.
Benefits

Despite the above-mentioned risks, interest-only mortgages offer considerable benefits to certain types of customers:


  • For those who wish to invest the savings from small monthly payments into other assets, this is a good option.
  • Those who plan to use the savings in improving the current property will also find interest-only mortgages beneficial in the long run, as the improvements would increase the value of the property.
  • The extra savings can be deposited into certain bank accounts and used later for children's education.
  • The savings could be used to clear other debts.
  • For those buyers who wish to invest in real estate, interest-only mortgages offer a good chance to invest and earn from a good and beneficial piece of property.
Lenders

There are a number of lenders offering different rates depending upon the interest-only mortgage plan chosen. To find the best deal, one needs to compare the rates of lenders in their locality, contact their financial advisors or local banks, consult friends or relatives, and search the Internet.

If you have additional questions regarding your financial options, please call us, and we'd be happy to recommend a tax professional to you. Our web site http://www.mortgageease.com should answer most of your questions, but your personal consultant is only a phone call away: Feel free to call us at 301-528-0332.

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