Interest Only Mortgage Payments

2007-07-24 08:31:47

( Financial )



What are Interest Only Mortgages?

Under an interest only mortgage, your lender does not require any principal payment until a specific deadline, usually five to ten years after the draw date. During the interest only payment period, you also have the option to pay a portion of your principal or pay the interest ahead of schedule, without incurring any penalties.

Interest only mortgages allow you to pay lower amounts than if you were to include principal. Forgoing your principal payments gives you an extra amount of liquidity to use for emergencies, tuition, home improvement or additional assets.

Most interest only mortgage payments are based on adjustable rather than fixed interest rates. And once the interest only period is over, you will end up paying more amortization payments than if you had arranged for a conventional loan payment scheme in the first place.

When are Interest Only Mortgages Ideal?

This type of mortgage is most suitable if you don't intend to keep your property for long. You make interest only mortgage payments, and then after a few years, you sell your home at a good price to pay off the principal. You not only save on principal payments but also profit from the sale of your home.

If you have unstable income levels, you will appreciate this type of mortgage because you have the liberty to add more to your interest only mortgage payments if you wish to reduce the loan balance.

Interest only mortgages are especially ideal if you reside in an area that has a high level of market demand. In such areas, the value of your home will most likely rise steadily over the years, yet you will find buyers easily when you need to sell.

Risks of Interest Only Mortgage Payments

There are also certain risks involved in interest only mortgages. You must be absolutely sure that you will be able to sell off your home before the interest only period expires, otherwise you will find yourself saddled with a hefty amortization payment schedule.

Since you don't pay principal during the interest only period, you also forgo home equity which you could have gained with a fully amortized loan structure. This will keep you from getting any additional loans or lines of credit based on your home equity.

Don't be misled by the misconception that interest rates are lower for interest only mortgage payments. You can still end up paying a higher monthly payment especially if your loan is based on adjustable rates.

When considering interest only mortgages, ask your lender for comparison charts showing both conventional amortizations and interest only mortgage payments, so that you can clearly see the differences. While looking up mortgages on the web, try using the loan payment calculator feature so that you have an idea of the approximate payment amounts.


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