Interest only Mortgages
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An Interest Only mortgage is one where only the interest accrued on the mortgage will be paid back making the payments more affordable, especially for first time buyers.
Of course the rest of the mortgage does eventually have to be repaid either by taking out a repayment mortgage perhaps when borrowers are in a better financial position or by selling the property.
The number of mortgages taken out on an interest only basis is gradually rising. In 2006 the numbers went up by a third.
Interest Only Mortgages Offer Alternative To Renting
The latest development in Mortgage products is the interest only loan. The Interest Only Mortgage is a variation of the variable rate Mortgage, and has been promoted as a way for homebuyers to keep their monthly payments low. Interest only loans can help maintain a positive cash flow during periods of time an individual’s income is restricted and are appropriate for some special circumstances.
Basically, Interest Only loans are just that: the borrower pays interest during a set period of time (standard time frames are 25 years). During this time, the principal amount is never touched.
Clearly, this is not an appropriate vehicle for the majority of homebuyers, but there are people for whom the Interest Only Mortgage would work well. If frequent relocation is part of an individual’s lifestyle, the Interest Only Mortgage may allow housing costs to be lower than the cost to rent and offers more flexibility to the home buyer in terms of location,. For example, families with children whose primary consideration in neighborhood selection is the quality of the school system may find the number of rentals in many of these prime locations limited or nonexistent. Their only option is to buy a home, but the combined costs of points, origination fees and monthly payments in conjunction with the fact that their tenure in the home won’t be sufficient to build equity, can be an obstacle. The diminished payments the Interest Only Mortgage provides create an opportunity to move into the community of choice without the constraints imposed by a traditional Mortgage. At the end of their stay, they can sell the property to pay off the remainder of the loan. In areas in which House Prices are increasing, they may even be able to take some cash away, which is something else a renter can never do.
Another candidate for the Interest Only loan is the retiree who wants to downsize his or her living quarters and move to a smaller single-family home. Older individuals who have sold a home that suddenly became too large may be able to use the proceeds from the sale of their original home to invest in income-producing equities or bonds that will help to supplement any pension, social security or retirement account fund distributions that serve as income, and be able to enjoy the benefits of home ownership with monthly payments that resemble rent. When the Interest Only period is up, the borrower can refinance with another Interest Only loan. Using an Interest Only loan in this way could be more economical than tapping into home equity with a Equity Release Mortgage; mortgage rates, fees and closing costs could be much lower for the Interest Only option. The downside is that the home will never be owned by anyone other than the mortgage lender, and the residence won’t become a part of the estate. And you have no guarantee that the mortgage term will be extended beyond a normal retirement age.
If both cash flow issues and housing needs are temporary for the moment, then Interest Only Mortgages makes sense. However, homebuyers who intend to make home ownership part of their long-term investment strategy should shop for the best rates on a traditional Mortgage and extend the loan life in order to keep monthly payments low. Refinancing or making additional payments to the principal when cash flow improves is always an option in this situation, and the ultimate goal of home ownership will be achieved.
