Only Mortgage

2007-03-08 10:33:40

( Financial )



An interest-only mortgage allows you the option of paying only the monthly interest for a specific period. What this means, is that a mortgage is interest-only if your monthly mortgage payment includes only the interest and not the principal. So long as the payment is mortgage-only, the principal does not diminish. If the loan is mortgage only until it reaches maturity, the balance at maturity will be the same as it was when the payment started.

In contrast, a fully-amortizing option is one that if continued, and the rate is unchanged, will pay off both the interest and principal at maturity. This is because the principal amount diminishes every time you make your monthly payment.

Most interest-only mortgages are interest-only up to a certain period. At the end of the term, the loan becomes fully-amortizing. This is because lenders want to avoid what happened during the Depression Era, when most loans were mortgage only and borrowers who lost their jobs defaulted on their payments. This led to a lot of foreclosures.

Advantages of interest-only mortgage

Why should you get an interest-only mortgage? One, it is more affordable in the early stages, as your monthly payment is minus the principal. However, there is a trade-off. Lower payment in the interest-only period translates to a higher payment after this period. Two, you maximize your investment leverage. If you can put your money into an investment with a rate higher than the mortgage rate, then you can earn the difference between the return on your investment and the interest payments. You can use the difference to pay off part of the principal when the interest-only period lapses. Three, if you don’t have long-term plans for staying in you house and plan to resell it, you could save on monthly payments on the principal. Plus, the interest payment is tax-deductible.


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