You are buying the home of your dreams with an ""interest-only mortgage!"" You'll get a low mortgage payment, and you'll maximize your tax deduction, all on your current income! Everything seems to be going good. But have you actually understood the notion of interest-only mortgage and how it functions?
Well it may break your bubble but there is no such thing as an interest-only mortgage - because eventually you'll have to pay the loan principal as well. In other words, with an interest-only mortgage loan, you pay only the interest on the mortgage in monthly payments for a fixed term. After the end of that term, typically five to seven years, you pay the balance in a lump sum, or start paying off the principal. Net net! What you're really getting is an interest-only payment method which can be combined with any type of conventional mortgage.
An Interest only mortgage can be an excellent option for some borrowers, who have a valid use for a lower initial required payment. For most homeowners, paying down mortgage debt is the most effective way to build wealth. Nonetheless, some may build wealth more rapidly by investing excess cash flow rather than paying down their mortgage. Of course for this to hold true, their return on investment must exceed the mortgage interest rate.
The interest only product was initially designed for persons whose income is cyclical. Borrowers with unpredictable incomes may value the flexibility the IO mortgage gives them. When their finances are tight, they can make the IO payment, and when they are flush they can make a considerable payment to principal.
Financial advisers don't recommend interest-only mortgages to regular wage earners who take out moderate-size home loans and don't have a strategy for investing the savings.
Dont rule out interest-only mortgages. Think its pro and cons to your specific situation and the lender you would be working with. On the hind side also bear in mind to question yourself that interest-only payment may be working for friends or family but does it work for you?
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