Interest-only Mortgage Loans
With property rates and interest rates rise, you might consider an interest-only mortgage. “Interest-only mortgage” is an old concept, which is making a big come back and finding acceptance from people who want to buy property. Interest-only mortgages were popular in the roaring twenties and seem to be just as popular today.
According to the interest-only mortgage mechanism, you only pay interest for a period of 5, 10 or 15 years. For instance, if you have taken an interest-only loan for a 30-year term and pay interest for the first 5 years you will pay only the principal for the rest of the 25 years. You stand to save money for the first five years in the monthly payments in comparison with amortizing mortgage. Again, at the end of the interest-only period, you may pay the principal in a lump sum, in installments or refinance your loan.
Interest-only mortgage loans are sought by people who earn less now, but have a promise to earn more in the future when the interest-only period expires, someone who is interested in investing the savings from the installment amount paid and a person who earns small commissions, regular bonuses and earns big amounts a few times a year. It is also legitimate for fast trackers that want to present an upscale image for career success.
This system is beneficial to save the principal amount or invest elsewhere while enjoying tax benefits and the appreciation of home ownership. During the interest-only period, the property rates may go up. The owner may sell the property at an increased price at the end of the interest-only period and earn a cool sum. Real estate dealers prefer interest-only mortgages.
However, the risks associated with interest-only mortgages are that real estate prices may go down or the borrower may lose their job.
Interest-only mortgages are not advised by financiers for people who are regular wage earners that take out moderate size loans and don’t have an investment plan in place. People who juggle their monies from one investment to another, real estate operators and people who earn low incomes but earn big bonuses to pay down the principals are the ones who are the target borrowers. Historically, interest-only mortgage was only of use for the affluent class who never worried about the big principal payments.
Interest-only mortgage loans are not worthwhile if the loan amount is large. For instance, if you took a loan of $200,000 at 7 percent you would be saving $200 per month for the first three years. If you borrow $400,000 at the same 7 percent, you would only be saving $325 and not $400. However, interest-only loans are finding a larger acceptability because of its flexibility.
In an era where sophistication, immediate gratification and soaring real estate prices hold sway, interest-only mortgage loans appear to be more viable. Consumers (borrowers) have lost interest in amortizing home mortgage. They want to hold mortgages for shorter periods and refinance them for around 1-7 years; they want to get hold of the perfect house. It’s the ‘having’ and not the ‘owning’ that prompts buyers to opt for this mechanism.
The tax saving options are also lucrative. You may not take a $500,000 mortgage normally. However, if it saves you $452 a month that you may put in your 401(K) a sum of $5400 a year, you will be more interested. The tax advantage of saving in 401(K) plus the usual tax benefit from the $500,000 mortgage loan would prompt you to go for an interest-only mortgage loan. Just make sure you can invest the savings wisely, the price of the property that you want to mortgage for goes up and you are ready to pay the principal at the end of the interest-only period.
About the Author: Anita Johnston is a staff writer for directlendingsolutions.com.
