What Is An Interest Only Mortgage?

One of the Buzz products in the mortgage industry over the last few years has been the interest only mortgage. A repayment schedule can be defined as "interest only" when the monthly mortgage payment only accounts of the interest and has no direct bearing on the principal. Obviously, this option will only be available for a specific period of time, usually 5 to 10 years. The homeowner has the right to pay more than just the interest in an effort to bring down the principal amount owed as well.

If the homeowner decides to go for the interest only option for the allowed., Any payments made during that period will include only the interest and no repayments on the principal will have been made at that point. The end result is for that period of time the balance of the principal that remains owed will remain the same.

Let's just take a quick look at an example of this:

30-year loan of $ 200,000 at 6.25% if the borrower has the option to pay interest only and chooses to go in this direction, the required payment is $ 1041.66.

On the other hand, a homeowner who had the same level of mortgage but without the interest only option would have to pay $ 1231.44. In this second example what the homeowner would be paying is called a "fully amortizing payment". Not alone – with this type are repayment schedule – would you be paying off the interest as you go along but you are also eating away at the principal all the time as well so in this case the additional difference in payment of $ 189.76 is "principal" , and this would go towards reducing the actual central amount owed by this amount each month.

Now let's look at good reasons for why you would want to take out an interest only mortgage in the first place. Well, probably the main reason that this would be a good idea for most people is if they have some specific reason for requiring lower repayments over a shortened period of time and are fully aware that they will have to pay the consequences of this over the longer term. A good example of this maybe somebody you have a naturally fluctuating income, which is to buy a house now but also understands that their income will be significantly higher at some points in the future. In this case it would make sense for the borrower to take advantage of the lower starting repayments knowing that they will be made to make up the difference once their income comes into line with being able to make those higher repayments.

As you can see, the interest only mortgage can be hugely helpful for some types of borrowers but is also very important to bear in mind that it will not suit everyone and it is by no means an easy option as you will still owe the full principal and you have to make up the difference at a later date. That said, once you are fully aware of the situation and still feel that this type of mortgage would suit you been a can can be an extremely effective way to finance the buying of a home.

Source by Here Allen

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