Should I Choose an Interest Only Mortgage?
An interest only mortgage is a mortgage where the borrower pays the interest only for a portion of the mortgage loan term, with both the principal balance and the interest only part remaining at the end of the interest only term. Interest only mortgages come in two forms: interest only and pay back only. In an interest only mortgage, the lender or broker marks an interest only date on the loan documents. The loan is made and the payments made to the lender at the interest only date. At the end of this interest only term, if the principal amount still remains unpaid (or in the case of a mortgage loan, the total amount of principal and interest still unpaid at the end of the interest only term exceeds the amount of the mortgage loan), then the mortgage is then converted to a pay back mortgage.
Mortgage lenders provide interest only and pay back mortgages to their customers. These interest only and pay back mortgages are different from traditional mortgages because they do not require a borrower to make any payments during the interest only portion of the loan term. Many mortgage lenders allow interest only and pay back mortgages to be used with traditional mortgages that require borrowers to make payment at the end of the term; however, these mortgages are often referred to as “second mortgages.”
Although interest only mortgages are becoming increasingly common, they are not without their pitfalls. These mortgages have been known to result in homeowners owing more money in the long run than they would if they had continued to make payments as per the terms of the loan. Interest only mortgages also tend to have much higher closing costs than standard thirty-year mortgages, and twenty-year amortizations. In addition, these mortgages usually only allow borrowers to borrow a smaller amount of the property’s equity than the remaining balance of the loan. Borrowers may also incur finance charges in addition to their mortgage insurance premium when they take out interest only loans.
One advantage of interest-only mortgages is that they are a good choice for borrowers who need a smaller amount of financing over a longer period of time but who expect to see some immediate appreciation in their property value. Homeowners may also benefit from interest only mortgages if they can extend their payments over a longer period of time. The primary disadvantage is that the interest only periods tend to be on relatively short terms; in some cases, principal balances will not be paid off until as little as five years after the property is purchased.
Traditionally, fixed interest rate Mortgages require the borrowers to commit to a specific interest rate throughout the life of the loan. However, as the mortgage market has become increasingly volatile, some mortgage companies have allowed their interest rates to vary from time to time. While it is certainly preferable to buy a mortgage with the locked-in interest rate, if the market interest rates fall below the lock-in amount at any point, then the borrowers will be required to refinance their loan.
There are several features that help a homeowner determine if interest only mortgages are right for them. If the homeowner anticipates that interest only payments will reduce the principal balance as much as possible over the first several years of their mortgage loan, then an interest only mortgage may be a good option. However, if the borrower expects to spend decades living in the home, then a standard interest only mortgage will probably be a better choice. The first ten years of the mortgage will also represent the highest monthly payment.
Another consideration is how long the borrower will remain in their home. Interest only mortgages allow the borrower to make a smaller initial payment, but the payment will be higher for the rest of the mortgage term. Homeowners should consider whether they want to lock in the interest only payments at the end of their mortgage term or whether they would rather have the payments begin after the beginning of their term and accrue interest. Another issue to consider is whether the interest only mortgage loan is right for the borrowers’ situation. If the borrowers do not plan to stay in the home for very long, they may not be interested in paying off their loan early.
It is important to remember that interest only mortgages require borrowers to pay off their loan early if they expect to remain in their home for the full term of the loan. If the mortgage does not include an interest only period, the payments will start right away and the borrower will have to deal with both the interest and the principal balance. This can add significantly to the homeowners overall debt. On the other hand, if the loan includes an interest only period, then the payments will stop once the primary term has ended. If the primary term has not yet ended, then the interest only period will last until the end of the mortgage.