Is An Interest Only Mortgage What You Need?

Posted by Nick Niesen on October 29th, 2010

Interest only mortgages are becoming more in demand - now that people are learning about them. Recent changes have made them more popular and it could be just the thing that you need. Here are a few tips that will help you determine if you should get an interest only mortgage.

Interest only mortgages give you the opportunity to buy a larger house than you might be able to obtain otherwise. They have an initial period of from 5 to 10 years in which the interest only is being paid. During this time period, your payments are lower because you are paying interest only. In a regular mortgage, each month normally includes some of the principal involved in the payment, and this slowly reduces both the principal and the interest.

An interest only mortgage is often attached to an adjustable rate mortgage, but can just as easily come as a fixed rate mortgage. If you get an interest only mortgage on an adjustable rate mortgage, it will enable an even greater reduction in the payment each month.

The actual idea of an interest only mortgage is a little deceiving. For one thing, there is no such thing as an interest only mortgage - you must pay the principal at some time. This mortgage is generally divided in two sections ? the first part being interest only with smaller payments, and then it changes to a fixed rate mortgage with payments that will enable a full amortization.

The individual that is best suited to this type of mortgage is someone who is on a short road to success - or at least believes they are. Not having all the money they need up front, they need to get a larger house, but are quite sure that their financial situation will rapidly be improving - soon. The lower initial payments gives them the opportunity to buy a larger house and the soon coming larger salary should come before the payments increase.

Many are now using an interest only mortgage to get the larger house, but have no real prospects of a larger salary. This could certainly lead to trouble with this type of mortgage. After the interest only mortgage changes to a fixed portion, and you start making payments on the principal, too, what happens is that the payments will now jump much higher. The payments were lower in the first place than what they should have been, but now the balance must be paid in the remainder of the time left.

If you are an investor and know how to take the extra portion of what would be your regular payment, and invest it for a higher return, then this could work well for you. Otherwise, it is probably just a good idea to make a full payment as often as possible, so that you can start reducing the principal before your full payments kick in.

When getting any mortgage, be sure to compare it with several other offers. This way you can see what is available, compare it, and find your best deal on an interest only mortgage.

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Nick Niesen

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Nick Niesen
Joined: April 29th, 2015
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