Title:
Interest Only
Mortgages: The Ins and Outs
Word Count:
933
Summary:
Learn about
interest only mortgages - the ins and outs and long term implications.
Keywords:
mortgage, online
mortgage, mortgage remortgages, bad credit mortgage, mortgage lead, mortgage
quote
Article Body:
Buying a home,
like any other big purchase, ought to be done only after one has taken all
measures to ensure that they are educated, informed, and prepared. There is nothing more gut wrenching and heart
breaking, not to mention just downright depressing, than committing yourself to
a six-figure debt only to find out that you didn’t actually pick the best kind
of debt for yourself. Now, I know that
some of you, like me, were taught that debt was a bad thing. Well, that is half true. There are too kinds of debt, responsible and
irresponsible. Irresponsible debt will
be a topic for a future article but I think it, well, responsible, to talk
about responsible debt as it pertains to the purchase of a house. The house purchase is generally considered an
all around good idea. The debt is
usually considered responsible across the board. There are, however, varying degrees of
responsible debt even within the boundaries of the house purchase. Having said that, I would like to take a look
at what an interest only mortgage is, whom it is designed for, what the rewards
are, and what the long-term implications are.
What is an Interest Only Mortgage?
An interest only mortgage is almost
exactly what it sounds like. There is
indeed a principle amount that goes along with it and you will indeed be held
responsible for the reimbursement of that principle loan. As the layman would say, if you borrow $100
and you only pay the interest for a while, you still eventually have to pay the
$100 back. What an interest only
mortgage does is allow you to, for a certain period of time, only pay towards
the interest of the your loan. It
doesn’t cut down the principle at all, at least not until the designated period
is up (usually 5 years).
Who is the Interest Only Mortgage Designed For?
The interest only mortgage is
designed for the homebuyer that is on a tight budget, or the homebuyer that
wants to buy something that is out of their price range. I suppose that in both situations the
homebuyer cannot afford the house but in one case they don’t earn enough to buy
anything and in the other, they just want to be able to live outside of their
means. But, nonetheless, the interest
only mortgage is for both of them. This
loan is also designed for people who are fairly certain that their income will
be increasing within the next few years because, unlike a fixed rate loan, the
payments on an interest only loan do rise.
What Are The Rewards?
There are some really great rewards
to an interest only loan. Because you
only are paying the interest and none of the principle, the amount of your
monthly payment decreases. On an average
size of, lets say $200,000, it will save you around $175-$200 per month in
payments. For someone on a tight budget,
that is a big difference. On a $1
million dollar loan the savings will approach $1,000 per month. The downside to it is that after the first 5
years (or whatever the term is that you have worked out for the interest only
part) your payments will jump up and be higher than they constant payments on a
fixed rate loan. It is definitely a nice
way to get into something that you cannot afford now but are sure you will be
able to afford later. It is also nice
for someone who is interested in buying a house and reselling it in a few years
for a profit as the money paid into it, the all around total investment, will
be less.
What Are The Long Term Implications?
Speaking of the long term is where
the interest only loan begins to get scary.
Imagine that you take an interest only loan for $100,000 and begin
making payments. Because you are paying
only the interest the payment would drop from the average fixed rate payment of
around $600 per month to $500 or so for the interest only loan. You continue in this manner for five years
and then the remaining balance is converted into a fixed rate loan. You still have an outstanding balance of
$100,000 but now you only have 25 years to pay it off instead of 30. In the end you will wind up paying $8000 to
$10,000 more over a 30-year period. If,
however, you do not plan on actually staying in that house for 30 years, the
long term implications is not that important.
Conclusion
As I see it, if you are trying to
get a house that you want to stay in until you are old enough to leave it to
your grandchildren, perhaps the interest only mortgage is not the best option
for you. It would be better in the long
run to go with something else, something that will not cost so much in
interest. But, if you are young,
nomadic, or on your way up the corporate ladder, this is definitely something
to consider. This type of mortgage will
allow you to get into a pricier house, have a little extra money for upgrades,
and then sell it in a few years for a large profit when that job promotion
forces you to move to another city. It
is a great way to save money in the beginning but can be a real gamble if you
stick it out for the long haul. And, as
always, sit down with a trained professional who knows your situation, your needs,
and your desires. They will be the best
assets you have when it comes to your assets!