 Sam
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 Posted: Sun May 30, 2004 10:42 pm Post subject: Interest only Mortgage: A Misnomer |
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Interest-only mortgage is a home loan which involves an interest only payment for an initial term of 5 to 7 years. The interest-only option is offered with fixed rate mortgages, adjustable rate loans and option ARMs. During the interest-only period, you pay only the interest, but at the end of the term, you have to make payments towards the principal as well to fully amortize the loan.
Features:
- Flexibility in payment: You are free to make payments towards the principal at any time within the interest-only period.
- Any interest rate type applicable: The interest-only mortgage can have both fixed as well as adjustable rates. So you can easily select the type of mortgage based on your financial ability to repay the loan.
Benefits:
- To increase purchasing power: You can buy a home having a higher purchase price.
- To increase cash flow: The money you save by paying only the interest for the initial period. This helps you to utilize the cash for other expenses.
- Investment option: One can invest the money saved monthly in real estate or stocks. The returns can be used to pay off the loan balance after the interest-only period.
ARMs with Interest-Only option
When you take an adjustable rate mortgage having an interest-only option applicable for 5 to 7 years, you actually pay the interest for that period. The interest rate during this period depends on what the lender will decide upon after reviewing the market conditions.
As the interest-only period terminates, the mortgage is converted to a usual adjustable rate loan. The interest rate adjusts periodically depending on changes in the indexed rate plus a margin. The margin remains fixed throughout the loan term. A rate cap also limits the increase or decrease in the interest rate.
Interest-only mortgages are of high benefits to consumers of different income levels - people with high income, young professionals, real estate investors, and first time buyers as well as those who experience a steady increase in their income. This kind of a mortgage helps you to save a lot of money during the initial period of the loan term and thereby invest the savings for better financial returns.
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