The Things you should know About an Interest Only Mortgage
You’ve probably heard of an interest only mortgage. Most people have. The problem is that most people have the wrong idea about an interest only mortgage. Now it’s time to set the record straight. Let’s have a look at what an interest only mortgage really is and who would be well advised to get one.
The first myth is created by the name ‘interest only mortgage’. Think about it guys – do you really think a borrower is only going to let you pay back the mortgage Of course they aren’t! The main thing about an interest only mortgage is that you pay off the interest first. Only then do you make in-roads into paying off the principle of the debt.
If you take out an interest only mortgage, you as the borrower will have to agree the period for which you only repay the interest and nothing else. Usually this period is between five and ten years. This will give you some breathing space over which to save some money or make money through investments. However, something to bear in mind is that this technique will not reduce the main body of your mortgage so you may want to pay off a little extra to reduce your overall mortgage. You have the right to do this but you need to check whether there are any penalty clauses for paying off your interest only mortgage early.
A traditional mortgage usually pays off your overall mortgage earlier than an interest only mortgage will, as you might expect, but if you can’t afford the initial payments of a traditional mortgage, interest only mortgages are a great thing. However, you need to bear in mind that, like other hire purchase agreements (which this basically is) you end up paying more money overall. Bit if it’s your only way to own your own home pr even break into the property business, you may not care about this.
So who is an interest only mortgage right for? Basically, those people who have a real need to make lower initial payments. If you expect to have a windfall such as inheriting money before you have to pay off the principle amount, an interest only mortgage is great for you. Also, if your income is variable, an interest only mortgage can be great for you too, as you can find one that you know you can cover the interest payments with from your minimum monthly income. You don’t need the worry of a more expensive monthly standard mortgage in those circumstances.
An added benefit of an interest only mortgage is that you can afford more house for your money. You may not want a starter home or that may not be practical for you. You don’t need to worry about that with an interest only mortgage.
A sensible thing to do is to invest the money that you save each month by not paying off the principal of the mortgage. If you invest this money sensibly, you can get yourself a great little nest egg that will help you pay off the principal quickly and again save yourself some money.
Of course, an interest only option is not the right option for everyone. But if you think it will suit your financial situation, look for an interest only mortgage that will give you reduced future payments if you can pay off a large amount of your mortgage; the options are out there.
Please read some of our other interesting articles on mortgages below:
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