Interest only mortgage
Interest Only Mortgage An interest only mortgage is referred to a mortgage plan where the mortgagor is not supposed to pay amount of the principal that has been borrowed for a certain period of time. During this phase the payment here only consists of the interest that has been agreed on and the loan balance remains unchanged. A loan that is interest-only for the full term would not amortize at any given point of time and the loan balance would be the same at the end of the term as it was at the outset.
The Interest Only Mortgage of today are interest only for a specified period, such as 5 years or the period of time that has been agreed on. At the end of that period, the payment is raised to the fully amortizing level. And when the payment achieves the amortizing level, the new payment becomes larger than it would have been if it had been fully amortizing at the outset. The tax saving on mortgage interest does not affect such comparisons because one has to pay taxes on interest earnings . If the borrower's income is so large that one loses some or all of the deductions, the after-tax return on mortgage repayment would be larger.
Eligibility Interest Only Mortgage suits best for :- Individuals who have an optional support that is about to get adjusted or would be adjusted in the coming days.Individuals assured of the fact that their money would have a better use than tied up in with their mortgage payment.Individuals who own a second home or an additional rental property.Individuals who don't have a fixed income (such as salespeople, investment bankers or self-employed people).Individuals looking to have the payment flexibility when the pocket is tight and for those who want to consolidate their debt.
Misconceptions
1.On an ARM (Adjustable Rate Mortgage) with an Interest Only Mortgage option, the quoted interest rate is fixed for the interest-only period. This might or might not be the case. Where it is not the case, this may be the most dangerous misperception of all because it can induce borrowers to take ARMs that don t meet their needs. The interest-only period is the period during which one is allowed to pay interest only. The period for which the initial rate holds is a different matter altogether. On an ARM with a very low rate, the interest-only period is always longer than the initial rate period, which in turn makes the repayment per month increases a lot more than expected.
2. Interest-only loans are appropriate if one don't expect to be in the house very long. If one doesnt expect to have the mortgage very long it makes sense to select an ARM because the rate will be lower, and it makes sense to avoid paying points because there won't be much time to recover the investment through a lower rate. But the decision to take an interest-only should not be affected by the time horizon.
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