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What Is An Interest Only Mortgage, And Should I Get One?
By: Shaan Randow iSnare Expert Author
There is a non-traditional type of home mortgage loan being marketed to
consumers known as an interest only home mortgage loan. Sometimes called a
balloon mortgage, an interest only mortgage is exactly what the name implies.
For the term of the mortgage, the borrower is paying only the interest that is
due on the home mortgage loan and is not paying anything back towards the
original loan amount.
At the end of the mortgage term, the balance due on the loan will be equal to
the full amount that was originally borrowed. This balance will be due, in full,
when the mortgage loan term ends.
Why an Interest Only Mortgage Loan Sounds Attractive
Obviously, we would all like our monthly mortgage payments to be as low as
possible. With an interest only home mortgage loan, the borrower is keeping his
monthly payments to a minimal by paying only the interest that was accrued on
the loan in the last thirty days since his last payment. Therefore, this type of
mortgage is often marketed to the consumer as a tool which allows the borrower
to “buy more of a home” than they would be able to afford with a traditional
home mortgage loan.
To illustrate this let’s take a look at the purchase of a $150,000 home. Buying
this home with a traditional 30 year fixed rate mortgage with a seven percent
interest rate would give you monthly mortgage payments of approximately $1,000.
On the other hand, if the consumer chooses an interest only 30 year fixed rate
mortgage at the same seven percent interest rate, monthly mortgage payments
would only be $695. This type of mortgage would be attractive to the consumer
who can afford $700 each month, but can not afford $1,000.
For the most part; however, financial advisors will tell you it is best not to
choose this type of loan except in rare circumstances. It is generally accepted
that an interest only home mortgage loan is an alright choice if you don’t
intend to hold the loan for more than a year or two and you are being offered a
great interest rate.
Why An Interest Only Mortgage Is Not A Good Idea
In general, it’s best not to choose an interest only option for your home
mortgage loan. Why? The largest problem with this type of financing is that the
home owner is not building any equity into his home with an interest only
mortgage. The home will still be considered “fully financed” even after the
mortgage term comes to an end.
There are also other reasons that an interest only mortgage is not usually your
best choice.
If you buy the home during a high market and the value of the house drops or
remains the same during the term of the mortgage, it is possible that even after
selling the home, you will still have money unpaid from your interest only
mortgage.
Furthermore, if the homeowner does not wish to sell the home at the end of the
mortgage term, then he will have to have another plan in place for paying off
the balance of the mortgage due.
As you can see, there are times when this type of loan would be wise—such as in
investment properties—but if you are buying a home and planning on living in it
for some time, it’s probably not the loan for you!
About the Author:
This article provided courtesy of http://www.business-loans-guide.com |
