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.
