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What Is An Interest
Only Mortage, And Should I Get One
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There is a non-traditional type of home mortgage loan being marketed
to consumers known as an interest only home mortgage loan. Sometimes
called a balloon mortgage, an interest only mortgage is exactly what
the name implies. For the term of the mortgage, the borrower is paying
only the interest that is due on the home mortgage loan and is not paying
anything back towards the original loan amount.
At the end of the mortgage term, the balance due on the loan will be
equal to the full amount that was originally borrowed. This balance
will be due, in full, when the mortgage loan term ends.
Why an Interest Only Mortgage Loan Sounds Attractive
Obviously, we would all like our monthly mortgage payments to be as
low as possible. With an interest only home mortgage loan, the borrower
is keeping his monthly payments to a minimal by paying only the interest
that was accrued on the loan in the last thirty days since his last
payment. Therefore, this type of mortgage is often marketed to the consumer
as a tool which allows the borrower to “buy more of a home” than they
would be able to afford with a traditional home mortgage loan.
To illustrate this let’s take a look at the purchase of a $150,000 home.
Buying this home with a traditional 30 year fixed rate mortgage with
a seven percent interest rate would give you monthly mortgage payments
of approximately $1,000. On the other hand, if the consumer chooses
an interest only 30 year fixed rate mortgage at the same seven percent
interest rate, monthly mortgage payments would only be $695. This type
of mortgage would be attractive to the consumer who can afford $700
each month, but can not afford $1,000.
For the most part; however, financial advisors will tell you it is best
not to choose this type of loan except in rare circumstances. It is
generally accepted that an interest only home mortgage loan is an alright
choice if you don’t intend to hold the loan for more than a year or
two and you are being offered a great interest rate.
Why An Interest Only Mortgage Is Not A Good Idea
In general, it’s best not to choose an interest only option for your
home mortgage loan. Why? The largest problem with this type of financing
is that the home owner is not building any equity into his home with
an interest only mortgage. The home will still be considered “fully
financed” even after the mortgage term comes to an end.
There are also other reasons that an interest only mortgage is not usually
your best choice.
If you buy the home during a high market and the value of the house
drops or remains the same during the term of the mortgage, it is possible
that even after selling the home, you will still have money unpaid from
your interest only mortgage.
Furthermore, if the homeowner does not wish to sell the home at the
end of the mortgage term, then he will have to have another plan in
place for paying off the balance of the mortgage due.
As you can see, there are times when this type of loan would be wise—such
as in investment properties—but if you are buying a home and planning
on living in it for some time, it’s probably not the loan for you!
About The Author:
Peter Dobler is a veteran in the IT business. His passion for experimenting
with new internet marketing strategies leads him to explore new niche
markets.
Read more about his experience with credit and mortgages; visit
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