Interest Only Loans
These days, as people scramble for new and more creative ways to
finance buying a home, the interest only mortgage is becoming
more common and well known. An interest only mortgage is one in
which you have the option of paying only the interest (or just
the interest and a portion of the principal) each month in the
early years of the mortgage loan. Interest only periods may be
applied to adjustable rate mortgages, or 30 year fixed rate
mortgages, depending on the lender.
In a traditional mortgage, each month your mortgage payment is
divided in two parts - one part is paid on the interest charge,
the other on the principal of the loan. The main feature of an
interest only mortgage loan is that during a specified initial
period of time - usually three, five, seven or ten years - you
may choose to make a payment of the interest portion of the loan
only. The option is flexible. One month you may choose to make
an interest only payment, another you may choose to make an
interest-plus-part-of-the-principal mortgage payment, or a full,
standard monthly mortgage payment. Needless to say, an
interest-only payment will be significantly less than a
traditional mortgage payment.
The flexibility of an interest-only mortgage allows you to
adjust your mortgage cost on a month by month basis, giving you
more control over your monthly cash flow. In any given month
during the interest-only period, you have the flexibility to pay
as much or as little on your mortgage as you can.
Interest only mortgages aren't right for everyone. While you
have the option of paying interest only each month during the
early years, the principal repayment on your mortgage loan is
accumulating. At the end of your interest only period, your
mortgage payment will take a dramatic jump. Financial experts
recommend interest only mortgages for specific types of
borrowers: those whose income is supplemented by large
commissions or bonuses throughout the year, those who can
reasonably expect to be making considerably more income in a few
years than they are now, and those borrowers who actually WILL
invest the difference between their interest-only payment and
their full mortgage payment in profitable investments.
The power of an interest-only loan, according to most experts,
is that you can 'afford to buy more house'. Because you'll have
the choice during the early years of paying only the interest
each month, you can effectively afford the monthly payments on a
house that's as much as 30% more expensive than you could with
an amortizing (typical) mortgage payment.
You also, however, have the choice each month of paying the
interest plus as much on the principal as you wish. If you're a
salesman, for instance, whose standard income is supplemented
quarterly and semi-annually by large commissions or bonuses, you
could pay interest-only during lean months, saving yourself up
to $350 in those months. In the months that you get a large
commission though, you could choose to pay down several thousand
dollars on the principal.
An interest only mortgage also makes sense if you have a solid
investment plan. If a typical mortgage payment would be $900
monthly, and your interest-only payment for the month is $625,
then the best financial strategy according to many financial
experts is to invest the remaining $275 in a solid, money-making
stocks program.
Interest only loans are not for everyone, but they can be a
valuable financial tool that can help you control your spending
and give your investment power some added oomph. Don't rush
blindly into an interest only mortgage, but do speak to a
financial expert or loan officer about whether an interest only
loan may be right for you.