Frequently asked questions on interest only mortgages
What is an interest only mortgage?
Interest only mortgage is an option given on mortgages borrowed over duration of time wherein the borrower has the option to pay for only the monthly interest occurring on the borrowed sum. There is no compulsion that he has to pay only the interest amount. He can pay more than if he wishes to on a monthly basis. The amount that he pays monthly on an interest only mortgage is calculated from the product of the monthly rate and the amount of principal. The loan balance remains unchanged when the borrower has opted to pay only the monthly interest. This option generally lasts only for a fixed period, commonly five to ten years which varies from lender to lender. After the end of the interest only tenure, the borrower starts paying the principal balance.
Which type of borrower suits interest only mortgages?
Those individuals with a genuine reason for the inability to pay large amounts in the initial time period can opt for the interest only mortgage. The must however be prepared to pay the amounts that follow the end of the interest only term which will definitely larger for its time to payback the principal.
Interest only mortgages are flexible and those individuals who do not have a fixed income for various reasons may find interest only mortgages, a lucrative option. Interest only mortgages give them the facility to pay according to their financial stand in the initial years. If the borrower is in a good financial position, he can pay more than just the monthly interest. This would be a better option as he would not feel the pinch of paying the principal later. But the borrower must have enough determination to pay that extra amount even if he is not required to in the interest only period.
Some individuals opt for investing their income rather than repaying their debts. Unless this option yields more money than the interest he has to pay, it is not very wise to invest when you have to repay debts on the interest only mortgage.
If you wish to buy an asset which is beyond your financial reach, interest only mortgage with their low payment option in the initial years enables you to qualify for the loan of a larger sum. It must however be ensured that your financial situation will improve by the time your interest only period terminates.
What are the hidden dangers involved in an interest only mortgage?
Though it is commonly believed that interest only mortgage carry a lower interest rate, it is not true. Interest only mortgages are riskier to lenders and hence they cover this risk by imposing higher rates of interest.
Another common misconception is that interest only mortgages do not require the payment of mortgage insurance. This is not true. The borrower must pay for the interest only mortgage insurance.
As long as the borrower is well aware of his financial stand and is able to predict it in the near future with a fair amount of accuracy, he can safely take an interest only mortgage.
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