Â?Truth Behind Interest Only MortgagesÂ?
(PRWEB) July 22, 2004
Presently, the property prices are escalating with a tremendous speed. This has led to the growth of interest only mortgages, despite warnings of slow down in the market. These days, interest-only mortgages are increasingly offered to homeowners, who are trying to stretch their budgets to afford a home. Interest-only mortgages are also a last resort for someone who is on the very edge of not being able to afford monthly payments.
Interest only mortgages are mortgages where only interest is paid to the lender and the principal is repaid only at the end of the mortgage term. It is also known as pure interest only mortgage.
Examples of Interest only mortgage are-
1. Endowment Mortgage.
2. Pension Mortgage.
These have become very popular recently, as increasing number of borrowers are opting for interest only payment schedules. As we know every coin has two sides, this is also true with interest only mortgages, which in reality are a smart money management tool used by the lenders.
They are originally designed for affluent and investment savvy borrowers, and serve a very little purpose for mainstream crowd.These mortgages give an option to just pay the interest instead of paying both the principal and interest. While they seem like a good option, they have certain hidden risks.
There are few things a borrower should know before going for such mortgage deal. They are:
1. These mortgages have lower monthly payments, which makes qualifying easier. But the lower payments don’t last forever.
2. Here, the principal payments don’t have to be made during the initial term of the loan, that doesn’t mean they are forgiven.
3. Here, borrowers still owe all of the money they borrowed, plus interest at the end of the initial fixed rate period.
4. The property can be sold at the end of the term if the borrower is unable to repay the mortgage principal.
5. The balance size of borrowerÂ?s mortgage will remain the same, and not be reduced at all as time goes.
6. As these mortgages delay the build up of equity, a borrower has to face huge losses in situations of falling home prices.
Interest-only mortgages are a very good deal for the lenders. The reason is that they keep all the mortgage principal busy earning interest dollars. That’s the primary goal of mortgage lenders to keep interest coming in. From the borrowerÂ?s point of view homeowners who plan to stay in their residence forever, should not go for an interest only mortgage. It is only suitable for homeowners who plan to live in their house for a very short period, not more than 10 years. By going to this deal, a borrower wants to save money, but the savings are temporary. If he /she are still in his/her home at the end of the interest only period, he/she will have to pay off the principal. The payments will be very large, because they will be amortized over a shorter period. Ultimately a borrower has to repay a whole amount.
But, interest only mortgages are great for homeowners who want to keep their payments at minimum while enjoying 100% tax deduction in their monthly payments. They are boon for borrowers who have uneven incomes. He/she can make small payments when money is tight and accelerate them when the money comes in.
In conclusion, Mortgage with interest only payment schedule may save you some money in a short run, while they are actually very costly in the long run.
If you have any other queries related to mortgage, feel free to visit this site.
http://www.mortgagekb.com
External resources:
1. http://www.mortgagekb.com/down-payment.html
2. http://www.mortgagekb.com/fixed-rate.html
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