MORTGAGES INTEREST ONLY DISADVANTAGES

2007-03-08 10:33:40

( Financial )



Mortgages interest only involves the monthly payment of a mortgage covering only the interest payments for certain period. Capital payment starts when borrowers finished paying off the amount of interest due for the mortgage. It usually involves payment of the loan principal at the end of the term. Borrowers are required to build up savings into a separate escrow account that will eventually cover payment of loan principal at the designated loan term.

The following disadvantages of mortgage interest only repayments to borrowers:

Mortgages interest only repayments do not pay off the loan. Building up a separate escrow or deposit account to pay off the principal amount of the mortgage provides the borrowers the risk of not accumulating enough earnings on the escrow account to pay off the loan. Thus, there is still a possibility of borrowers shelling out cash when the earnings from the investment on the escrow account cannot cover the full amount of the loan at the end of the term.

The repayment plan on the loan principal is deposited in an escrow account that is tied up with the stock market. Performance of the stock market is volatile that increases the risk of borrowers not earning the expected return of their investments. Borrowers solely relying on the earnings of the escrow account as payment for their loans will have to face the risk of not having enough funds to pay off the full amount of the mortgage at the end of the term.

The loan balance in an interest only mortgage remains the same over a certain period. Thus, the risk of paying higher amount of interest is higher particularly for loans with variable interest rate.

Mortgages interest only is suitable for people who cannot raise enough funds on a monthly basis to pay off the amount of principal loan. However, they should be confident that their income would increase as the loan term ends to cover the amount of loan principal payment paid on a lump sum.


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