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Interest only mortgages: What you need to know

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Getting a mortgage can be a bit overwhelming especially if it is your first time. If you haven’t done it before, you probably are only thinking of having enough money to make a down payment and getting approved by a mortgage lender. However, there are still quite a lot to consider including the type of mortgage you’ll be applying for.

There are multiple types of mortgages that a lender may offer to you. You can also ask them upfront if you already have a certain type of mortgage in mind. However, for many beginners who are just starting with their careers but would already want to own a property, they would go for an adjustable-rate mortgage like the interest-only mortgage rates.

What is an interest-only mortgage?

This type of mortgage sound exactly what it is. For this, a buyer or the borrower will only be required to pay the interest of the loan for a certain period. Once that period expires, they will then have to start repaying the principal at a lump sum or during a specific date that is determined by the lender.

This type of loan or mortgage can be an option for new buyers or only for certain borrowers. There are also instances wherein the borrower will only have to pay for the interest throughout the loan’s duration and pay the principal all at once. The bottom line is that it could be structured in different ways.

If you get approved for this type of loan, you may only be required to pay for the loan’s interest for at least seven to ten years. After that specified period or what they would call the introductory period, you’ll be given a standard payment schedule on a fully-amortized basis. This means that you’ll pay not only for the remaining principal but also for the interest.

There are special considerations too for this type of mortgage. If your house gets damaged, you may be allowed to only pay for the interest-only after the introductory period. However, this may also mean that you’ll be required to make a high maintenance payment.

Why people choose this type of mortgage

Knowing what an interest-only mortgage is all about, one may begin to wonder why people would choose such an option if they will still eventually pay for both principal and interest anyway. This type of mortgage work best for certain people who are after making low payments for a certain period.

These are the people who are eventually expecting high income after a few years. This would also work well for people who could make periodic principal payments like the ones who have large annual bonuses.

People who would also like to buy expensive properties would apply for this loan because they won’t have to pay a huge amount each month during the first few years. They most likely are also waiting to eventually earn more money.

If there’s a common ground for people who are aiming to get this type of mortgage, it’s the fact that they know that they can afford how much they will have to pay after the introductory period. This is why you should only apply for this loan if your job is stable and if you’re expecting to get paid higher in the future.

What else could happen after paying off the interest?

Well, this will depend on what you want to do. Some borrowers would refinance their loans after the introductory period. Doing this will make them have a new contract with new terms that potentially have lower interest payments. Some would just make a lump sum payment after that certain period.

Selling the property or the house you have mortgaged to pay off the loan is also an option. This would work well if you’re planning to eventually move to a different state or if you’re simply considering buying a new home.

Conclusion

Like all types of mortgages, there are pros and cons when it comes to availing of this. This is mostly beneficial to the people mentioned above. If you’re expecting to get a higher income in the next few years, then this would work well for you.

However, know that if you’re only paying for the interest, you’re not exactly building up any equity. Building equity will only happen if you already start paying for the principal of your loan. Note that when this happens, you’ll have a higher monthly payment and it could be a problem if you’re not financially ready for it.

Overall, it’s of utmost importance to consider your future financial standings and you have to be sure about it. What you don’t want is to get your house repossessed during a downturn. You need to plan ahead of time if in case unemployment happens or if your source of income is exhausted.


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