Interest Only Mortgages – How It Works For You
Home buyers have recently found a way to buy houses that they cannot normally afford. They can do this with interest only mortgages.
Interest only mortgages are gaining popularity because it allows for reduced monthly payments for the borrower.
For traditional mortgages, the monthly payment you make consist of a portion used to pay off interest and a portion that go toward paying the principal. As you make more monthly payments, the interest portion decreases and the principal portion increases until you fully pay off the mortgage.
An interest only mortgage allows you to only make interest payments in the initial years of the mortgage loan. You will only start to pay the principal at a future specified period of the mortgage loan. This make your monthly payments lower and therefore, you can obtain a higher mortgage deal from the loan lender.
When the interest-only period of the mortgage is over, your monthly payments will increase as it now starts to incorporate your principal amount also.
There is a variety of interest-only mortgages offered by mortgage lenders. They can come with adjustable rate and fixed rate options.
Paying Off Your Mortgage Faster With Interest Only Mortgages
By paying off your mortgage in lump sums, you can actually pay off your mortgage much faster than traditional mortgages.
The main concern most people have with interest only mortgages is that they may be subject to higher interest rates after the interest-only period. This really depends on the market. In all likelihood, there will also be a cap on interest rates that will be charged.
If you foresee that you will be making much more income in the future, an interest only mortgage can suit you. When the interest-only period expires and you have to make higher monthly payments, your income can afford to take up the extra commitment.
Also note that you could have refinanced the mortgage with a better deal even before the interest-only period expires.
For a start up businessman, interest only mortgage can be very attractive. It allows him to buy a more luxurious home now.
Interest only mortgages are very attractive to home buyers for a very simple reason. By not being to required to pay off the principal during the initial years, the home buyer can use the funds originally set aside for the home purchase to invest in other investment vehicles.
Interest only mortgages will be very attractive for those appreciates the time value of money and wish to use financial leverage to increase their assets.
More On Adjustable Rates Mortgage
You may have heard of the concept of good debt and bad debt. Good debt is the kind of debt that helps you create assets. It gives you financial leverage to acquire assets that you will normally not be able to acquire. Capitalizing on financial leverage is not for the risk adverse. So decide for yourself whether using leverage to acquire assets is at your comfort level.
If you are buying a house without leverage, you might as well put your money in a time deposit. Buying a house with a mortgage loan is using leverage. It is the leverage that allows you to acquire the asset and increase you returns.
A very popular mortgage loan program is the adjustable rate mortgages (ARMs).
It allows you the options to choose what payments to make on the monthly payments. There are many fancy names used by mortgage lenders for ARMs for branding purposes. But the concept is the same. The interest rate can change with the market during the life of the mortgage loan.
