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What’s the Deal with Interest Only Mortgages?
Have you heard that commercial about
interest-only mortgages...the one where you’re
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 you’re
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 you’re
keeping the principal at minimum value while continuing
to pay interest at 100%. With a more conventional mortgage
you’d 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 you’ll 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 won’t 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 you’ll have to start paying on the
principal, then an interest-only payment may be ideal
for you.
There’s a great deal of fine print
to any mortgage. Evaluate your own goals; be vigilant
when reviewing the terms on the loan you’re considering
before acting.
1howto.com
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