What’s the Deal with Interest Only Mortgages?
Have you heard that commercial about interest-only mortgages...the one
where youre told about what a wonderful benefit it is to have a low,
low mortgage payment and all the wonderful tax write-offs you will
receive?
Before you decide to buy now and pay later, that is pay big time later,
take a moment to enlighten yourself a bit more about these so-called
interest only mortgages. Think about it for a moment. If you just pay
the interest on your home, will you ever start paying on principal and
will you ever earn any equity into your property?
By definition, a mortgage is a temporary, conditional pledge of
property to a creditor as security for performance of an obligation or
repayment of a debt. Simplified, that means you borrow money from a
financial institution and they essentially buy your house and you pay
it back. How can this happen if youre just paying interest? More
accurately, interest-only mortgages are a temporary reprieve for paying
off a traditional mortgage. You may actually be prolonging the
inevitable and eventually making it even more costly to pay off your
mortgage.
Far too many people are in debt way over their heads because of
interest-only mortgages. They took advantage of attractive offers to
buy now and pay later. With an interest only payment youre keeping the
principal at minimum value while continuing to pay interest at 100%.
With a more conventional mortgage youd be slowly dwindling down the
total interest amount.
Most interest-only payment schedules are offered on Adjustable Rate
Mortgages (ARMs), but they can also be found on a fixed rate mortgage.
Interest-only payment periods almost never run for the entire term of
the loan which is typically 15 or 30 years. Depending on the terms of
your contract, you could be expected to start paying on the principal
in five, seven or ten years. Once the interest-only period ends, your
monthly payment will go up because then youll be paying on both
principal and interest.
Conversely, interest-only mortgages can be a good thing for some
people. For those people wanting to purchase a bigger/better home for a
lower down payment AND who anticipate moving within seven years, the
interest-only payment method may be the way to go. However, keep
in-mind that in a "down" realestate market you generally wont be
building equity and making money by doing it this way. The majority of
the money made from investing in real estate comes from an increase in
value to the home. The average person moves every seven years anyway.
Gone are the days when people stay in a home thirty years. Hence, if
you anticipate moving before youll have to start paying on the
principal, then an interest-only payment may be ideal for you.
Theres a great deal of fine print to any mortgage. Evaluate your own
goals; be vigilant when reviewing the terms on the loan youre
considering before acting.