FinanceDogma – Finance, loans, creditcard and mortgages

March 8, 2011

Interest Only Mortgages-How Do they Work?

Filed under: Mortgage — Tags: — admin @ 12:48 pm

Interest only mortgage options are available to you, and though most mortgage brokers consider them extremely risky, knowing the information for yourself will help you to decide what’s best for you.

Are Interest Only Mortgage Right For You?

An interest only mortgage is a mortgage property that is designed so you can pay only the interest on your monthly payment, or choose to make a payment toward your principle as well. Often, you’ll find that mortgage brokers avoid selling an interest only loan because they feel that they’re too risky, but you can make the choice for yourself if you know the truth about these types of loans. Of course, not every loan will be right for every consumer, and this is especially true for these products. If you are thinking about using a loan like this, then you need to have a plan in effect.

What, Exactly, Is An Interest Only Loan?

These are loans in which you only have to pay the interest due on your mortgage each month, for a certain term. At the end of this term, you’re presented with a variety of options. The term is generally between five to seven years.

Pay Off Your Principal

The interest only payments will not affect the principal at all. Once the term is up, you can then choose to start making payments on your principal. At this point your payments will increase, but the overall balance won’t change.

Refinancing The Loan

After the interest only term of your loan is up, you have the option of refinancing. Most interest only loans have a significantly higher interest rate, so this is a desirable option for many people who finance using interest only loans.

Pay Off Your Balance

You can, of course, choose to pay your home loan balance. You may want to note that if your home’s value hasn’t risen sufficiently then you may owe a rather large balance on your loan.

Who Can Benefit From An Interest Only Loan?

Interest only loans may be good for those whose income can fluctuate or have incomes based on commissions. If you own a business, you’re a salesperson and some others, interest only loans will allow you to make smaller payment regularly and make larger payments when you’ve received a bonus or earned money from another source of income.

First time home buyers might also find an advantage in that they can use the interest only portion of their interest only loans as a way to get ready for the higher cost of owning a home. This will give the new home buyer a chance to adjust to their costs and save money for things which are to come.

Those who are very good at saving money can also benefit from these types of loans. These people reap the best of the rewards by saving a good deal of money during the interest only portion of their loan and using it to invest in other properties or investments. This allows them to make a great deal of money, much more quickly than with a regular home loan, which they can then use to pay off their homes faster.
There Are Downsides

As with everything, there is a disadvantage. If you haven’t used the interest only portion of the loan wisely and you’re not prepared for the rise to come when you have to pay your principal, you can quickly find yourself behind on your mortgage. Of course, if you use the time as it was intended, you won’t have this problem. As long as your remember that the day will come when your payments will rise dramatically, you should be fine with your interest only loans. Used wisely, these loans can be excellent tools for those who know what they’re doing.

 

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