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An guide to Interest Only Mortgage
from: Daniel ReedA mortgage is "interest only" if the scheduled monthly mortgage
payment - the payment the borrower is required to make
--consists of interest only. The option to pay interest only
lasts for a specified period, usually 5 to 10 years. Borrowers
have the right to pay more than interest if they want to. An
interest only mortgage means your monthly payments cover only
the interest on the loan. They do not pay off the amount you
owe. So, at the end of the mortgage term, assuming you have made
all the interest payments, you will owe the same amount that you
borrowed at the beginning.
An interest only mortgage stays the same throughout the mortgage
term. Interest and a premium to an investment scheme are paid
monthly. At the end of the term, the proceeds from the
investment vehicle are intended to repay the mortgage. The
amount will depend on the performance of the investment scheme.
If you choose an interest only mortgage you are responsible for
ensuring that you have sufficient funds available to repay your
mortgage at the end of the term.
For What Types Of Borrowers Are Interest Only Mortgages
Suitable?
Interest-only mortgages are for borrowers who have a valid use
for a lower initial required payment, and are prepared to deal
with the consequences. A valid example is the young borrower
with a long time horizon who invests in a diversified portfolio
of common stock. This should generate a yield of 9% or more over
a long period. Another is business owners who might earn a high
return investing in their own businesses.
Ask yourself whether you are disciplined enough to make the
payment to principal when you aren't obliged to. Ask yourself
whether you are comfortable with the risk that the expected
higher income won't materialize.
What Hazards Should You Watch Out For An Interest Only
Mortgages?
The major hazard is being deceived into accepting an
interest-only mortgage that does not meet any of the suitability
tests described above. The deceptions are about alleged
desirable features of interest-only that don't in fact exist.
The main advantage to an interest only mortgage is initially
seen in the payments you make to your lender. The fact that you
will only be repaying your interest here means that your monthly
payments will be much lower than they would be for a repayment
product.
If your investment does not give you good enough returns, you
won't have enough money to repay the capital owed. So, it's
vital to take good and qualified advice before buying an
interest only product and then to track your investment progress
on a regular basis.
You also need to consider the fact that the rates you get for an
interest only mortgage may not be as favourable as those on
offer for repayment mortgages.
About the author:
Daniel Reed is the author of An Guide to Interest Only Mortgage. He is the chief editor
for http://www.funinusa.com .
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