Interest-Only Mortgages
An interest-only mortgage is a type of home loan that requires the borrower to make interest-only payments. The term that is interest-only is somewhere between 5 and 10 years. This term, however, does not mean a borrower cannot pay down the principal. If the borrower chooses to pay interest only, then the payment will not include any payments toward the principal balance, and therefore the loan balance will remain unchanged during the interest-only term.
Interest only mortgages are suitable for a wide variety of borrowers who are prepared to deal with the consequences of differing financial circumstances that arise over time. One thing to note is that interest-only mortgages have a lower initial payment and this may be good for those just starting out. For those who have fluctuating income, the interest only home loan may provide a bit of flexibility during the initial interest only term. If money is tight, then the borrower can stick to paying the interest only. If incomes rise and the borrower has a little extra money, they can begin making payments on the principal and lower their interest payments.
The type of borrower suitable for an interest-only home loan is one who is able to manage their money wisely and make payments to the principal when they are in good financial status. The interest-only mortgage may also be good for those wanting to skip the starter house and move into a larger house. Of course, this depends on your future plans. The reason for this is that selling a house and moving costs money. Money initially may be tight, but if you expect your income to rise, then it may be worth the initial financial strain.
This type of mortgage may also be good for those looking to invest money in other markets such as the stock market or for those who are looking to make quick capital gains. For those interested in investing in other markets, the excess cash flow may allow you to put that money elsewhere to capitalize on your cash flow. Additionally, the interest-only mortgage allows borrowers to buy a bigger house because of the lower payment. Buying a bigger house can mean greater capital gains in the short term depending on the housing market.
One thing to consider in an interest-only home loan is that they usually carry a higher interest rate because after the interest-only period, the balance is higher than with loans in which the principal is paid along with interest. Additionally, some lenders attempt to deceive the borrower into accepting an interest-only mortgage by making claims about them that do not exist. These claims include: lower interest rates than identical loans without an IO option; having not to pay mortgage insurance; a fixed-rate for the IO period; and the interest-only home loan is less expensive. None of these are exactly true and any deception by the lender should be your sign to move on to another honest lender.
As with any financial decision, do your research and make sure the terms are right for you. Not all loans are for all borrowers or for all circumstances. Know your own financial circumstances and how they might change over time. Knowledge is your key to making sound financial decisions.