A mortgage is "interest only" if the scheduled monthly mortgage payment - the payment the borrower is required to make --consists of interest only. The option to pay interest only lasts for a specified period, usually 5 to 10 years. Borrowers have the right to pay more than interest if they want to. An interest only mortgage means your monthly payments cover only the interest on the loan. They do not pay off the amount you owe. So, at the end of the mortgage term, assuming you have made all the interest payments, you will owe the same amount that you borrowed at the beginning.
An interest only mortgage stays the same throughout the mortgage term. Interest and a premium to an investment scheme are paid monthly. At the end of the term, the proceeds from the investment vehicle are intended to repay the mortgage. The amount will depend on the performance of the investment scheme. If you choose an interest only mortgage you are responsible for ensuring that you have sufficient funds available to repay your mortgage at the end of the term.
For What Types Of Borrowers Are Interest Only Mortgages Suitable?
Interest-only mortgages are for borrowers who have a valid use for a lower initial required payment, and are prepared to deal with the consequences. A valid example is the young borrower with a long time horizon who invests in a diversified portfolio of common stock. This should generate a yield of 9% or more over a long period. Another is business owners who might earn a high return investing in their own businesses.
Ask yourself whether you are disciplined enough to make the payment to principal when you aren't obliged to.
Ask yourself whether you are comfortable with the risk that the expected higher income won't materialize.
What Hazards Should You Watch Out For An Interest Only Mortgages?
The major hazard is being deceived into accepting an interest-only mortgage that does not meet any of the suitability tests described above. The deceptions are about alleged desirable features of interest-only that don't in fact exist.
The main advantage to an interest only mortgage is initially seen in the payments you make to your lender. The fact that you will only be repaying your interest here means that your monthly payments will be much lower than they would be for a repayment product.
If your investment does not give you good enough returns, you won't have enough money to repay the capital owed. So, it's vital to take good and qualified advice before buying an interest only product and then to track your investment progress on a regular basis.
You also need to consider the fact that the rates you get for an interest only mortgage may not be as favourable as those on offer for repayment mortgages.
About the Author
Daniel Reed is the author of "An Guide to Interest Only Mortgage". He is the chief editor for http://www.funinusa.com.