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Interest Only Mortgages
By definition, a mortgage is a temporary, conditional pledge of
property to a creditor as security for performance of an
obligation or repayment of a debt. Simplified, that means you
borrow money from a financial institution and they essentially
buy your house and you pay it back. How can this happen if
you're just paying interest? More accurately, interest-only
mortgages are a temporary reprieve for paying off a traditional
mortgage. You may actually be prolonging the inevitable and
eventually making it even more costly to pay off your mortgage.
Before you decide to buy now and pay later, that is pay "big
time" later, take a moment to enlighten yourself a bit more
about these so-called "interest only mortgages." Think about it
for a moment. If you just pay the interest on your home, will
you ever start paying on principal and will you ever earn any
equity into your property?
In fact, far too many people are in debt way over their heads
because of interest-only mortgages. They took advantage of
attractive offers to buy now and pay later. With an interest
only payment you're keeping the principal at minimum value while
continuing to pay interest at 100%. With a more conventional
mortgage you'd be slowly dwindling down the total interest
amount. Most interest-only payment schedules are offered on
Adjustable Rate Mortgages (ARMs), but they can also be found on
a fixed rate mortgage. Interest-only payment periods almost
never run for the entire term of the loan which is typically 15
or 30 years. Depending on the terms of your contract, you could
be expected to start paying on the principal in five, seven or
ten years. Once the interest-only period ends, your monthly
payment will go up because then you'll be paying on both
principal and interest.
On the other hand, interest-only mortgages can be a good thing
for some people. For those people wanting to purchase a
bigger/better home for a lower down payment AND who anticipate
moving within seven years, the interest-only payment method may
be the way to go. However, keep in-mind that in a "down"
realestate market you generally won't be building equity and
making money by doing it this way. The majority of the money
made from investing in real estate comes from an increase in
value to the home. The average person moves every seven years
anyway. Gone are the days when people stay in a home thirty
years. Hence, if you anticipate moving before you'll have to
start paying on the principal, then an interest-only payment may
be ideal for you.
There's a great deal of fine print to any mortgage. Evaluate
your own goals; be vigilant when reviewing the terms on the loan
you're considering before acting.
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