Finance Articles

Should You Get an Interest-only Home Mortgage?

Before you consider taking out an interest-only mortgage, you should first understand what they are. Unlike traditional, fixed-rate mortgages, interest-only mortgages allows the borrower to initially pay the interest on the principal for a short period of time, rather than making payments on both the principal and the interest. This is how it works: say, for example, you've taken out a mortgage for $100,00.00, which would require a monthly payment of around $1,000.00. However, with an interest-only mortgage, the same payment would only amount to around $695.00. You could use the extra money to pay existing debts, like credit cards or student loans, or perhaps invest it.

The concept of an interest-only home loan is not a new one. A descendant of the jumbo market, these types of mortgages were initially geared towards those who intended to utilise the excess cash for other types of investments. This is an ideal option for the market-savvy investor, as it frees up some income for other projects. However, this type of mortgage has now entered the mainstream market, and is available to most home buyers.

There are many benefits associated with taking out interest-only loans. They allow younger buyers to take advantage of a developing real-estate market, giving them the opportunity to afford a slightly higher priced home.

Before taking out an interest-only mortgage, there are few things that you must take into consideration. While the thought of only having to pay for interest for the next few years may seem very tempting, you must remember that when the interest-free grace period is over, you will have higher payments than you would have with a traditional mortgage. Many young couples do not account for this, assuming that they will be earning more money in the future, not anticipating that they may face financial hardships down the road, thus putting their home at risk.

While there are many advantages to taking out an interest-free mortgage, it is important to remember that the grace period will not last forever and that the monthly payments will eventually go up. As long as you make financial plans for the future, taking advantage of an interest-only mortgage could allow you to increase your financial well-being, bringing you peace of mind.

Mark Lambie is the founder of The Loan House a website that allows consumers to quickly and easily get online mortgage quotes and mortgage information.

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