Interest only mortgages are a great choice for borrowers who are looking to save money and plan their loans carefully. Interest only mortgages work by requiring a borrower to pay interest only on the initial borrowing of a mortgage, also called the interest only mortgage. After the interest only period is complete, the borrower will have paid nothing on the mortgage. Therefore, after the interest only period, the mortgage holder will be able to sell the property at a foreclosure auction and recoup the remainder of the money from the borrower.
In general most interest-only mortgages stipulate that the amount of principal is the same throughout the loan term. A slight increase in the interest rate may result in an increase in the principal balance. However, because interest only mortgages contain a clause stating that the amount of principal paid during the interest only term does not increase, they are a great choice for borrowers who want to have the security of an established monthly payment for a specified time period. Many lenders offer interest only mortgages with adjustable interest rates; however, the payment option, when available, should be one that has a fixed rate.
When you purchase a new home, you usually finance the mortgage through a loan that is for the full purchase price. If the interest rates decrease over the course of the mortgage term, the mortgage must be increased to cover the difference. This is where the interest only mortgage comes into play. With an interest only mortgage, the borrower is able to make interest payments only on the initial borrowing of the mortgage, called the interest only mortgage. After the interest only period is complete, the borrower will have paid nothing on the mortgage and will have paid nothing down yet.
The reason why interest only mortgages are referred to as "interest only" is because at the end of the term of the loan, there will be absolutely no payments to the lender. Instead, after the interest only period is complete, the outstanding principal balance will be due and the borrower will owe the total principal balance plus the amount by which the interest-only payments have been reduced. The resulting figure will determine the amount of the mortgage rate. For example, if the interest-only mortgage were to have a mortgage rate of 7 percent and the outstanding principal balance was ten thousand dollars, the resulting mortgage rate would be approximately six hundred percent.
Because interest-only mortgages offer lower monthly payment amounts, they are often taken by borrowers with adjustable interest rates. However, even when interest rates are at record lows, these mortgages are still a great option for borrowers who wish to keep their mortgage rates below the current market. As the primary loan remains at a fixed interest rate, the borrower's monthly payment amount will not change. However, the monthly payment will decrease over time as the amount of the mortgage is withdrawn from the borrower's monthly income.
While interest only mortgages can offer low initial payment amounts, they often come with a long introductory interest-only period. During this introductory interest-only period, the interest rate will be higher than normal. In order to prevent the interest rate from rising after the introductory period, borrowers should stop paying extra money towards the loan. Once the introductory interest-only period has ended, the borrower will be subject to the standard interest rate on their mortgage. Interest only loans can prove to be a very valuable financial tool, but they do require regular repayment during the life of the loan.
If the borrower is able to repay the principal balance of the loan in full each month, interest-only mortgages can prove to be an excellent financial tool. Unfortunately, many homeowners choose to live beyond the minimum payments required to ensure that they remain financially afloat. While interest-only mortgages do provide lower payments at the start of the loan, it is common to see a sudden increase in monthly payments as the principal balance on the loan increases. This is because the borrower is paying less every month but then increases the principal balance due. Because of this, many homeowners find themselves in a vicious cycle where they are paying more than enough to maintain the loan, yet cannot keep up with the payments and eventually fall behind.
If you are in this position, you may want to consider refinancing your mortgage. With an interest only mortgage, your monthly payment amount will not increase until you have completely paid off the loan. You can use the proceeds from this new loan to reduce your current costs or use it to make large one-time purchase. Another benefit of refinancing an interest only mortgage is that you can avoid a possible balloon payment at the end of your term if your payment is much higher than the interest rate at the time of the refinancing. Before making any major financial decisions, it is important to talk with a qualified professional to get answers to all your questions about interest-only mortgages.