Interest Only Mortgages
A mortgage is a secured loan that applies to real property, and an interest-only mortgage comes with a very distinctive definitive feature – the regular repayments actually only cover the interest portion of the loan. It is different from fully amortizing mortgages due to the fact that the principal does not have to be repaid or reduced throughout the life of the loan. A borrower bound by the terms of an interest only mortgage is given the freedom to repay the principal at his own accord and convenience.
By way of example, a borrower who secures a mortgage worth $75,000, at an interest rate of 6%, only repays about $375 every month. This amount of repayment is equal to the interest only portion of the mortgage and will not involve any deductions from the principal amount. The monthly dilemma of repaying a mortgage is lessened with an interest only mortgage. Borrowers are not required to pay the principal back until the end of the loan term, or when their finances permit, whichever is sooner.
Top seven reasons for getting an interest only mortgage
- Interest only mortgages are quite handy to the pocket. In case of financial instability, borrowers are only required to pay the interest. Should they be able to make ends meet already, they can then choose to add a further amount to the repayment in order to pay off the principal. Since interest only mortgages are mostly defined through 5-10 years of repayment, a borrower is given enough freedom to consolidate his finances with his monthly obligations.
- The chance to get a more expensive home can more of a reality with an interest only mortgage. Even when the income does not permit, a borrower can still “afford” the better choice since the required initial payment is also lower.
- A borrower can use funds which would ordinarily have been used to pay off the principal into another income-generating venture rather than tying it up in the mortgage. A good example would be investing on a business rather than paying the principal, to allow for tight cash flow.
- The chance of a quick turnover may fall well with an interest-only mortgage. For a more expensive house, the capital gain from a quick sale can outweigh the need to pay off any principal.
- The interest paid on a mortgage is 100 percent tax deductible when the home is to be used as an investment property to be rented out. That means if the investor has an interest only mortgage on the property, 100 percent of the repayments can be deducted as an expense.
- An interest only mortgage allows for proper distribution of income when there are two mortgages covering a single property. In the case of a house covered by an interest only mortgage and a Home Equity Line Of Credit (HELOC) at the same time, it would be imperative to take care of the HELOC first.
- Most interest only mortgages come with an adaptive feature. Should there be repayment of an amount more than the set interest every month; the corresponding next repayment is reduced.This makes the modes of repayment easier to a borrower.
Cons of interest-only mortgages
Should one or more benefits cited above be absent under the terms of an interest only mortgage, it can be then considered a disadvantage. There are various loopholes that a borrower may fall prey to. 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 full terms under which they are bound by the mortgage.
This guide will hopefully make a potential borrower more prepared to secure interest only mortgages. This kind of mortgage is only beneficial when used to its full potential.