Mortgage loans often come with real property purchases. These primarily aim to ease the whole paying process for every average person who has the dream of owning their own home. There are many choices when it comes to home loans. Just the same, there are as many possibilities… both positive and negative.
One option commonly taken by potential property purchasers is the Interest Only Mortgage loan. At first glance, this kind of lending scheme is like the tooth fairy of the lending world. Interest Only Mortgage Loans often come with the promise of 0% down payment, fixed financing options, 30 year amortization and more. Another alluring element present would be the possibility of having to pay only the interest within a certain amount of time. Yes, these all seem worthy of applause and patronage. However, are these interest only loans really worth the savings?
As far as savings are concerned, other types of loans and interest only mortgage plans are almost, if not totally the same. Buyers will still have to pay for the amount they borrowed in due time. The only difference would be from the terms of payment. In Interest only loans, a buyer will have to pay the agreed upon interest alone for a certain period of time. Although this might sound really tempting, it also has a downside.
The easy and relaxed payment of your interest only privileges will amount to nothing after the agreed upon period. After five years of paying interest, the principal debt will still be at the same amount. The interest you have paid for the past few years merely stalled you the time. It is like preventing the inevitable. When the time comes, you will have to pay the principal amount. Putting it plainly, interest only loans may require less payment but also result to less progress. Compared to an ordinary mortgage plan, an interest only loan no longer seems as advantageous as it used to be, doesn’t it?
Just like any other loan, one with the interest only clause is just advantageous as long as you play within the premises of your loan. However, going astray will lead to ballooned up interests and harsh financial situations. The interest rate may jump up by up to 50% of the original after a certain period of time. This will be on top of the principal amount you have failed to pay off due to your interest only privilege. If you’re not careful, you might just end up in a default, losing your home and the money you paid for interest all at the same time.
Another misconception on interest mortgage loans is the lower interest rate. Although your local borrower may promise this to you, it wouldn’t necessarily have to be true. Interest only loans have higher default possibilities, due to its slow amortizing qualities. As such, interest only loans may even come at higher rates.
The only differences would come from the adjustable rate mortgages and fixed rate mortgages. Of course, interest only privileges attached to an ARM, will result to lower interest compared an FRM without the aid option. However, an ARM with or without the interest only clause will prove no different. The same is the case with FRM loans.
Short term purchases aren’t even better with interest only options. Some people actually believe that they can save money by using this option whenever they plan a short term purchase. Although it can be a little clever, it still won’t work. Even if you don’t intend to live in a house for so long, the property won’t be yours unless you fully pay for it. For example, you have exercised to pay only the interest for the first five years, since you have plans of moving out. Once you do and fail to meet your financial obligations to the creditor, the property will be repossessed. You will leave with nothing. Your interest payment would most likely resemble renting out a property for a very long time.
With all these said, the verdict is quite clear. An interest only option is not really such a good choice. It still is best to start paying both the debt and the interest as soon as you can. Perhaps it may mean more pressure… but definitely more progress as well.
