Interest Only Mortgages

What are Interest Only Mortgages?

Interest only mortgage feature an interest only payments which do not contain the principal. This is not a type of loan secured by real estate as a pre-condition to make interest payment available. Here is an example of the payment scheme in interest only mortgage:

A $200,000 loan, with an interest of 6.5% per month will have a monthly amortization of $1,254 per month, containing principal and interest in a 30-year loan.
An interest only payment will only be $1,083.
The difference between a principal and interest payment of $1,254 and an interest only payment of $1,083 is a savings of $170 per month.

This saving can be invested to earn more money or be used for you other needs.

When is an Interest Only Mortgage an Option?

If you have plans of investing your money and earn from it than paying it to your mortgage balance or have other investment needs to take care of, you might consider choosing interest only mortgage. This will enable you to buy time and meet other financial needs.

Interest only mortgage works well with the savvy investor type of clients who prefer to utilize what would have been paid for their monthly installments payment for other more productive investments.

Interest only mortgages are beneficial also for first-time home buyers. During the first year of ownership, new home owners generally struggle in getting used to paying mortgage payments.

In interest only mortgage, it does not necessarily follow that the home owner be required to pay interest only payments. It however gives the borrower the option to pay a lower payment during the early period of the loan.

Buyers, who have fluctuating income like those who earn on commissions instead of a fixed salary, will also benefit from an interest only mortgage option. These kinds of borrowers regularly pay interest-only payments in the duration of the slim months and pay bigger and extra amounts when commissions or bonuses are received.

The important feature of an interest only mortgage is that the loan balance will never increase. Interest only mortgages don’t have a provision for negative amortization unlike other mortgage loans.