Interest Only Mortgage Basics

2007-03-08 10:33:40

( Financial )



Many first-time home buyers are attracted to interest only mortgages because such loans can help materialize their dream of owning a house. However, many are unaware that these loans could create financial problems to those who do not fully understand the concept behind interest only mortgages.

Interest Only Mortgage Defined

The type of mortgage where your monthly payments are only composed of interest on the loan and the principal amount of your mortgage is settled at the end of the term is called interest only mortgage, which includes fixed rate interest only mortgages. In this type of financing, you need a huge amount of money to be able to payback the money that you borrowed in full. If you are unable to repay the interest only mortgage at the end of the agreed period, you might stand losing your house or property. Regular wage earners and first-time home buyers must think many times before obtaining interest-only financing, especially if they are not familiar with saving and investment schemes.

Who Should Take On Interest Only Mortgage

Only people who are expecting to receive a big sum of money in the future or those whose earnings take the form of commissions and occasional bonuses are the ones who are ideal to get interest only mortgages. Veteran investors who are certain that the principal payments, which are typically paid on fixed or adjustable rate mortgage, are spent on sure money-making investments could reap the benefits of interest only loans.

Benefits and risks

The main advantage of an interest only mortgage is the low monthly payments. Since you are only paying for interest, your monthly amortization will be substantially lower compared to monthly repayments on other financing products. Another benefit is that the interest paid to such loans is entitled for tax write-offs at year-end.

The major risk attached to this type of loan is that you might lose your home if you fail to pay your loan at the end of the agreed payment date. Many fail to raise enough cash to pay for their mortgage because their profit growth fell short of their expectations, the value of their home did not appreciate as anticipated, or they were not able to save enough cash because they do not have the discipline to save or keep their extra money.


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