Interest Only Mortgages The Ins And Outs

Buying a​ home,​ like any other big purchase,​ ought to​ be done only after one has taken all measures to​ ensure that they are educated,​ informed,​ and prepared. There is​ nothing more gut wrenching and heart breaking,​ not to​ mention just downright depressing,​ than committing yourself to​ a​ six-figure debt only to​ find out that you​ didn’t actually pick the​ best kind of​ debt for yourself. Now,​ I know that some of​ you,​ like me,​ were taught that debt was a​ bad thing. Well,​ that is​ half true. There are too kinds of​ debt,​ responsible and irresponsible. Irresponsible debt will be a​ topic for a​ future article but I think it,​ well,​ responsible,​ to​ talk about responsible debt as​ it​ pertains to​ the​ purchase of​ a​ house. the​ house purchase is​ generally considered an​ all around good idea. the​ debt is​ usually considered responsible across the​ board. There are,​ however,​ varying degrees of​ responsible debt even within the​ boundaries of​ the​ house purchase. Having said that,​ I would like to​ take a​ look at​ what an​ interest only mortgage is,​ whom it​ is​ designed for,​ what the​ rewards are,​ and what the​ long-term implications are.

What is​ an​ Interest Only Mortgage?

An interest only mortgage is​ almost exactly what it​ sounds like. There is​ indeed a​ principle amount that goes along with it​ and you​ will indeed be held responsible for the​ reimbursement of​ that principle loan. as​ the​ layman would say,​ if​ you​ borrow $100 and you​ only pay the​ interest for a​ while,​ you​ still eventually have to​ pay the​ $100 back. What an​ interest only mortgage does is​ allow you​ to,​ for a​ certain period of​ time,​ only pay towards the​ interest of​ the​ your loan. it​ doesn’t cut down the​ principle at​ all,​ at​ least not until the​ designated period is​ up (usually 5 years).

Who is​ the​ Interest Only Mortgage Designed For?

The interest only mortgage is​ designed for the​ homebuyer that is​ on​ a​ tight budget,​ or​ the​ homebuyer that wants to​ buy something that is​ out of​ their price range. I suppose that in​ both situations the​ homebuyer cannot afford the​ house but in​ one case they don’t earn enough to​ buy anything and in​ the​ other,​ they just want to​ be able to​ live outside of​ their means. But,​ nonetheless,​ the​ interest only mortgage is​ for both of​ them. This loan is​ also designed for people who are fairly certain that their income will be increasing within the​ next few years because,​ unlike a​ fixed rate loan,​ the​ payments on​ an​ interest only loan do rise.

What Are the​ Rewards?
There are some really great rewards to​ an​ interest only loan. Because you​ only are paying the​ interest and none of​ the​ principle,​ the​ amount of​ your monthly payment decreases. on​ an​ average size of,​ lets say $200,​000,​ it​ will save you​ around $175-$200 per month in​ payments. For someone on​ a​ tight budget,​ that is​ a​ big difference. on​ a​ $1 million dollar loan the​ savings will approach $1,​000 per month. the​ downside to​ it​ is​ that after the​ first 5 years (or whatever the​ term is​ that you​ have worked out for the​ interest only part) your payments will jump up and be higher than they constant payments on​ a​ fixed rate loan. it​ is​ definitely a​ nice way to​ get into something that you​ cannot afford now but are sure you​ will be able to​ afford later. it​ is​ also nice for someone who is​ interested in​ buying a​ house and reselling it​ in​ a​ few years for a​ profit as​ the​ money paid into it,​ the​ all around total investment,​ will be less.

What Are the​ Long Term Implications?

Speaking of​ the​ long term is​ where the​ interest only loan begins to​ get scary. Imagine that you​ take an​ interest only loan for $100,​000 and begin making payments. Because you​ are paying only the​ interest the​ payment would drop from the​ average fixed rate payment of​ around $600 per month to​ $500 or​ so for the​ interest only loan. you​ continue in​ this manner for five years and then the​ remaining balance is​ converted into a​ fixed rate loan. you​ still have an​ outstanding balance of​ $100,​000 but now you​ only have 25 years to​ pay it​ off instead of​ 30. in​ the​ end you​ will wind up paying $8000 to​ $10,​000 more over a​ 30-year period. If,​ however,​ you​ do not plan on​ actually staying in​ that house for 30 years,​ the​ long term implications is​ not that important.

As I see it,​ if​ you​ are trying to​ get a​ house that you​ want to​ stay in​ until you​ are old enough to​ leave it​ to​ your grandchildren,​ perhaps the​ interest only mortgage is​ not the​ best option for you. it​ would be better in​ the​ long run to​ go with something else,​ something that will not cost so much in​ interest. But,​ if​ you​ are young,​ nomadic,​ or​ on​ your way up the​ corporate ladder,​ this is​ definitely something to​ consider. This type of​ mortgage will allow you​ to​ get into a​ pricier house,​ have a​ little extra money for upgrades,​ and then sell it​ in​ a​ few years for a​ large profit when that job promotion forces you​ to​ move to​ another city. it​ is​ a​ great way to​ save money in​ the​ beginning but can be a​ real gamble if​ you​ stick it​ out for the​ long haul. And,​ as​ always,​ sit down with a​ trained professional who knows your situation,​ your needs,​ and your desires. They will be the​ best assets you​ have when it​ comes to​ your assets!

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