A mortgage is a loan secured for real property and an interest only mortgage comes with a definitive feature – the monthly repayments should cover the interest only.This type of mortgage is not like the fully amortizing mortgage since the set amount of repayments do not recompense for the principal.Instead, the borrower is given the authority to pay for the principal at his own arrangement.
Example: an interest-only mortgage that is worth $100,000 comes with an interest rate of 5.5% and would make $458 for repayment every month.This amount is equivalent to the interest alone and will not pay the principal owed.The monthly dilemma of repaying a mortgage is eased with the clear warrant of an interest-only mortgage.Borrowers are supposed to pay the principal only when their finances permit.
Six positive notes on interest-only mortgages
- Firstly, interest only mortgages are quite handy to the pocket.In case of financial instability, borrowers are bounded to pay only the interest.Should they be able to make ends meet already, they can then add a substantial amount to the repayment in order to pay the principal.Most interest-only mortgages are secured for a period of 5-10 years, which gives ample time to repay the total amount owed from the lender.
- Two: the avenues to get a more expensive dream house come within closer reach.Having a small income can be overlooked as a borrower pays low initially, under an appropriate mortgage that suits his paying capacity.
- Three: a borrower is given enough freedom to invest in other income-generating opportunities.Since the monthly repayments are set on a lower price, a borrower may invest on a business for example and make use of favourable revenue to earn more than what should be exhausted.
- Fourthly, a fast turnover can happen with an interest-only mortgage.An expensive house is deemed to up the ante when it comes to capital gain, especially when the market allows for its appreciation.
- Fifthly, proper provision of income can proceed especially in the case of two mortgages covering a house.In the case of a house covered by an interest-only mortgage and a HELOC at the same time, it would be imperative to take care of the HELOC first.
- Sixthly, interest-only mortgages involve an adaptive advantage when it comes to monthly repayments.Whenever payment for the principal is made, the next repayment will be markedly reduced.This is one of the best features that come with interest-only mortgages.
Some drawbacks on interest-only mortgages
The simple premise which would give in to a disadvantageous interest-only mortgage demonstrates when one or more of the practical pluses mentioned above could not even materialize.There are many traps which a borrower may be a victim of.These are mostly deceptions that make a borrower think of accepting advantages that are not even there.One example of this would be getting a cheaper interest rate on an interest-only mortgage than its fully amortizing equivalent, when it should naturally be otherwise.If it should it be otherwise, a borrower is mostly misled and should look into the market which bounds the mortgage.
All of these facts should make a borrower more responsible in scrutinizing the terms that cover an interest-only mortgage.This kind of mortgage is only beneficial when reaped of its full potentials.