interest only mortgage rates : What Does This Imply ?

2008-04-07 12:48:55

( Financial )



Certain people will go to any lengths to buy a house. If they can’t get a mortgage for which they have to pay off both the principal and the interest they settle for one whereby they pay only interest – at least for a while.

But is this wise? After this interest only mortgage rates get expensive (even if you find the best interest mortgage).

And that’s exactly why you shouldn’t get an interest only mortgage without fully understanding every risk – and then thinking twice.

Interest only mortgages first appeared on the mortgage scene in 2001 and since then have grown at a phenomenal rate. In 2001 they were a fraction of new mortgages. But 2004 nearly one third of new mortgages carried interest only mortgage rates. In 2005 in certain places where the price of housing was accelerating they represented a half of new mortgages – sometimes even more than half.

So what is an interest only mortgage?

As implied by the name – you pay only the interest. This amounts to a smaller monthly payment – but you aren’t reducing the principal. So this reduced payment is not a true reflection of what your interest only mortgage rates will demand of you in the future. So even if you pay off the interest for five years, you still owe exactly what you borrowed.

There are two factors which drive the trend
- high housing prices mean that you struggle to even buy your first home
- it suits buyers who want to own a home while still minimizing their cash flow.

Paying interest only mortgage rates you can qualify for a better house while reducing your monthly payments. How? Because the amount you are allowed to borrow is limited by what you can afford to pay each month, not, in fact, by what percentage goes toward lessening the principal.

You are not however prevented from gaining home equity. After all, there are two ways of building equity:
- reduce the principal
- the increase of the value of the home with time.
If you can’t reduce the principal, your equity gain is reliant on the increase of property values.

There are different ways of handling interest only loans.

You can make extra payments (either occasionally or regularly – and reduce the principal in this way).

Or you can rely on the value of your property rising and then sell so that you make a profit even though the original amount of the home hasn’t been reduced at all.

This makes sense when home prices appreciate rapidly. But increasingly you can’t rely on this anymore.

So if you keep the mortgage until the interest only period runs out, you could face a big shock at what happens to your monthly payments. After 5 years most interest only loans become an adjustable rate mortgage, which is amortized over the following 25 years. So the principal is being paid off in 5 less years at the current interest rate. This can be a sizeable payment.


All rights Reserved © Tradenet Services srl
Do not duplicate or redistribute in any form.