Interest Only Mortgage
Despite what numerous web sites or mortgage companies
may advertise, the first thing to note with interest
only mortgages is to not be mislead, there is actually
no such thing as an interest-only mortgage. Eventually
you'll have to pay the loan principal as well. What
you're really getting is an interest-only payment
scheme, which can be combined with any type of traditional
mortgage.
Your monthly repayments to the lender consist simply
of the interest that you owe throughout the mortgage
term, and you pay back none of the outstanding debt
until the end of the mortgage term.
With an interest-only mortgage, your monthly repayments
are made up of three parts: interest on the capital
you owe your lender; life insurance; and a contribution
to an investment plan designed to pay off the outstanding
capital at the end of the mortgage term. An interest-only
mortgage will generally work out slightly cheaper
per month than a repayment mortgage, but is inherently
more risky - there is no guarantee that the investment
plan you choose will generate enough capital to pay
off the outstanding debt at the end of the mortgage
term.
In the early years of a standard mortgage, the interest
takes up about 95 cents of each dollar paid to the
lender. The standard payment on a 6%, $100,000 loan
is about $600; of that, $500 is interest, "saving"
you $100 per month. Not paying any principal now means
that you'll pay more interest later. Interest-only
payment mortgages aren't a new offering. Rather, like
many innovative schemes, they originally grew out
of the less-rigid and more inventive jumbo mortgage
markets. As such, they were typically aimed at well-heeled
clients who preferred to utilize what would have been
the principal portion of their payment for other,
hopefully more productive investments.
Most interest-only payment schemes are offered on
Adjustable Rate Mortgages (ARMs), but they can be
found on a fixed rate mortgage (FRM) as well. They've
also entered the mainstream, so that they're available
to just about all borrowers. The loans you'll find
will most likely be sold to a secondary market dealer.
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