Interest Only Mortgage – Not For Everyone

A mortgage is considered interest only when the payments the borrower makes consist only of interest for a specified period of time. If the borrower chooses to also pay some of the principal, that is the underlying money owed, he or she is also allowed to. If the borrower only pays the interest every month the loans balance will not change because the principal owed is not being paid off. Interest only loans are good for people who need to have a lower amount to pay each month in the beginning. This is because in a regular loan you will be paying nearly the same amount in interest and then the additional charge of the principal. The problem with this is if the borrower chooses not to pay any principal the base amount owed will not go down which banks see as more risky, thus interest only mortgages are usually assigned a higher annual percentage rate than their principal/interest repaying counterparts.

Interest only mortgages tend to be adjustable rate mortgages not Fixed Mortgage Interest Rates, which can make them more dangerous because you can get lured in with a low starter rate but then eventually the interest rate flies much higher than the fixed rate form of mortgage so be sure to avoid this trap or you will pay dearly in the long run.

Even though fixed rate mortgages may have a slightly higher rate than the introductory rate of an adjustable rate mortgage it can be very advantageous to lock in a low fixed rate. Imagine interest rate on a fixed rate is 5.5% annually while an adjustable is 4.75%. Over the first few years the adjustable may save you some money, but once rates go up, as they surely do, your adjustable rate mortgage can go to 9, 10, even 15% while the person with the fixed rate happily pays his or her 5.5%.

Unless you have a reason you need to pay less in the beginning it is better to get a regular vanilla mortgage. For example you want a better house and can’t afford the higher payments a regular mortgage will demand but will soon be able to pay off the interest and principal alike.

Always do your homework before jumping into a life changing investment that involves large loans. A simple added or deducted word could cost you thousands. It is very important that you research with diligence prior to making a decision.

By Suzana