This is a risky product and does have its disadvantages. They are tricky, because they can be misleading as the payment is very small for the first 1,2,5,7 or even 10 years. Note that for the Mortgage you will have a balloon payment for the entire principal balance at the end of the loan term.
Interest only mortgages might be beneficial for people in markets where houses appreciate rapidly and the plan is to remain in the house for only a couple of years. The mortgages are available in both fixed rate and adjustable rate varieties, but most interest only mortgages are of the adjustable rate variety. Since only an interest payment is due, interest only mortgages usually have a lower monthly mortgage payment than mortgages that require principal and interest payments.
For example, if you have taken an interest only mortgage loan for 5 years you only pay the interest on your mortgage for 5 years. The mortgage rate is an adjustable rate determined by the current interest rate. This preset margin will stay fixed throughout the remaining term of the loan while the interest only mortgage rate added to it will change (generally on an annual basis) with the fluctuation of the current index rate. So after the interest only period is over you will be paying the adjusted interest only mortgage rate and the principal,which will increase your mortgage payments.
Interest
Interest only mortgages usually have an interest only payment option during the first 1, 3, 5, 7, or 10 years of the mortgage. The payment does not mean negative amortization. This type of mortgage is generally not a long term solutions. This loans type are the latest tool aimed at offsetting high home prices but represent a somewhat higher risk for lenders, and therefore are subject to a slightly higher interest rate. The Interest-only loans are a popular ways of borrowing money to buy an asset that is unlikely to depreciate much and which can be sold at the end of the loan to repay the capital. It will helped homeowners afford more home and earn more appreciation during this time period. It may turn out to be bad financial decisions if housing prices drop, causing those borrowers to carry a mortgage larger than the value of the house, which in turn will make it impossible to refinance the house into a fixed-rate mortgage.
Conclusion
It is important to keep in mind the nature of interest only mortgages. Although interest only mortgages play a vital part in the mortgage industry, often providing the only means for first time buyers to hold the key to their own front door, misusing this type of loan is counter-productive. A sample of the 3 payment options on a loan amount of $250,000 would be:
Minimum Amount Due $804, Interest Only Mortgage $989, 30 year payment $1304, 15 year payment. In summary, an Interest Only Mortgage Loan can save you thousands of dollars and possibly earn you thousands more with the right diversified investments over time. An interest only mortgage loan gives people the tools necessary to manage their debts as carefully as they manage their assets. 30 year interest only mortgages typically come with a ten year (often referred to as a 30/10 year interest only loan) or fifteen year fixed (30/15) interest only period.
Best for people who:
Are very focused on money management Want to reduce their monthly mortgage payment Do not intend to be in their homes more than a few years Interest only mortgages and loans as the name suggests, means you pay interest only for the first three, five, seven, ten years of the loan, thereby lowering your monthly mortgage payment by quite a lot.
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