interest only mortgage payment : The Right Choice?

2008-04-07 12:48:40

( Financial )



Owning your own home is everybody’s dream. But home prices are high and often the dream might seem out of your reach. Your monthly mortgage payment can become more affordable when your lenders offer you a home loan permitting you to:
1) only pay interest in the first years of the loan period
2) only make a specific minimum payment, less than the loan’s monthly interest.

This way, every month, you make an interest only mortgage payment. Most online mortgage companies have an interest only loan payment calculator if you want to calculate this expense accurately.

Whether reinforcing your mortgage or buying a house interest only mortgage payments could be an option you would like to consider.

You need to decide if an interest only mortgage payment or an adjustable-rate mortgage giving you the option for a minimum payment is the right choice for you.

But be very careful with a payment option ARM’s and an interest only mortgage payment; you might have to deal with:
- payment shocks: your payments can go up considerably (even double or triple) when the payments adjust or after the interest only period.

Additionally with payment-option ARM’s be prepared for the possibility of:
- negative amortization: if your payments don’t cover all of the owing interest, the unpaid interest added to the balance of your mortgage means that you owe more than you borrowed at first.

So be absolutely sure that you realize the full implications of the loan terms as well as the risks involved. Above all, be brutally realistic with yourself as to whether you can really deal with future payment increases. If you don’t feel comfortable – consider another loan product.

But what exactly is an interest-only mortgage payment?

With a traditional mortgage you have to pay back some of the principal (the money you borrowed) as well as interest. In this way the principal becomes less over the loan term. On the other hand with an interest only loan plan you pay only interest for a certain number of years. After this you have to repay both principal and interest.

Most mortgages offering this plan have an adjustable interest rate – so monthly payments inevitable change over the life of the loan.

The changes may occur once a month or maybe only every couple of years – this depends on your loan.

You pay interest only typically from several up to even 10 years. After this, the monthly payment naturally increases, since you are paying back the principal and interest now.


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