Interested in an Interest Only Mortgage?
These days, banks and lenders have various types of loans available for people. In some cases, a conventional mortgage is fine. But there are times when only an interest only mortgage will do. Let’s look at the advantages and disadvantages of an interest only mortgage.
Okay, first and foremost, an interest only mortgage has a lower monthly payment than just about any P/I – principal and interest loan. So, they can be a wise choice for people who need or want to keep that payment low in order to build up their cash reserve. Next, such a loan means that a person can qualify for a bigger mortgage. The way a loan works, the bank/lender approves your loan amount based on your ability to make the monthly payment. That means, if you can afford to pay a traditional P/I mortgage of $335,000 at a six percent interest rate, you could get a $400,000 loan at the same rate, if it is an interest only mortgage! That gives you a nice chunk of additional money.
Of course, just because the loan is called interest-only doesn’t mean you can’t pay on the principal; it only means you do not have to, at least at the beginning. In general, you are allowed to pay up to twenty percent of that principal each year without any penalty. Another plus to this type of loan is if you are going to sell your home or refinance before the interest-only timeframe ends. The reason: that is when the payment goes up, quite a bit.
And finally, an interest only mortgage lets you buy a home, even if you do not have much in the way of savings, but you have good income and credit. These days, home prices sometimes rise above a person’s capacity to save up a proper down payment.
Now, on the other hand, there are some disadvantages. You must keep in mind that the monthly payments will go up quite a bit after the interest-only period ends. Also, that payment will depend on what the interest rates are, at that time. So, you need to consider, if you are not going to refinance the loan and you do not plan to sell the home, make sure the resulting payments is within your means.
And, that leads to the next disadvantage: what exactly your payment will be when the interest-only period ends. As it will be tied to the interest rate at the time, you won’t know the payment amount when you get the loan. So, be mindful of that.
Then there is the issue of gaining equity. If that is what you are after, then you need to pay down the principal of your mortgage. Well, with an interest only mortgage, you are not doing that. Or, rather, you are not required to. So, if building equity is important to you, be sure to make some principal payments, whenever possible.
So, it is easy to see that an interest only mortgage can be an excellent means of getting a good-sized mortgage and keeping your monthly payment reasonable. Just be sure to take some precautions to insure that you are able to handle the eventual payment. With just a little planning, an interest only mortgage can be an ideal way of getting the home you want
Please read some of our other interesting articles on mortgages below:
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