Is an interest only mortgage right for you?
When considering whether or not to obtain an interest only mortgage you should have all of the facts. Although they are considered by some mortgage brokers to be risky and less desirable than other types of loans, being armed with the truth about interest only mortgages will help you formulate your own opinion. Just as with any other mortgage that is available, not every loan is right for every borrower, and this is certainly true for interest only mortgages. If you’re considering an interest only mortgage then it’s important that you have a plan.
What is an interest only mortgage?
Interest only mortgages are mortgage loans in which you only pay the interest due on the mortgage each month, for a fixed term. At the end of the term, which is usually between five to seven years, you have a few options:
Pay off the principal – Since interest only payments do not contain the principal, once your term is up you then have the option to start making payments toward the principal. This is the point at which the payments will increase, but not the overall balance of the loan.
Refinance your loan – If after the interest only term is up and you decide that you’d like to refinance for any reason, you can do so. Since most interest only loans do have a higher interest rate, refinancing is a desirable option for many.
Pay off the balance – You can of course choose to pay off your home loan balance, but it’s important to note that if the value of your home has not appreciated sufficiently then you may be faced with owing a large balance.
Who benefits from interest only loans?
Individuals with incomes that fluctuate or are based on commissions and fees – For individuals whose income fluctuates such as business owners, salesmen and women, and others, interest only loans allow them to make smaller payments on a regular basis and then to make larger payments once they receive their bonuses and other sources of income.
First time home buyers – Some first time home buyers opt for interest only mortgages as a way to deal with the increased costs when having a new home loan. By selecting this type of home loan, first time home buyers give themselves time to adjust and save money.
Those who are savers – If you can consistently take the money that you do not have to pay during the terms of your interest only loan and save it, then you can truly take advantage of the benefits of this type of loan. Individuals who can wisely save and even invest the money into their home or other investments can save and make a good deal of money too.