What is an Interest-Only Mortgage?

An interest-only mortgage, as may be evident from the name, is a type of mortgage wherein the borrower is required only to pay off the interest that arises from the principal. This has the added advantage of the interest rates remain fairly constant throughout the term of the mortgage. However, the principal amount will need to be paid off eventually; the time period allotted for an interest-only payment is about up to 5 years. This is especially useful in cases wherein the individuals do not have a high income to pay off mortgage rates; large payments can, therefore, be deferred until more funds are available to the borrower. Once the interest-only mortgage term is over, the borrower can pick from two available options, subject to criteria: the interest-only mortgage can be renewed or the principal amount repaid through standard means like a normal mortgage or liquidating investments, whichever is more suitable to the borrower’s financial condition at the moment of termination of the mortgage.

However, the fact remains that at the end of each month, you will still owe the lender the same amount of money as before, with no contribution made towards the depreciation of the principal amount. Additionally, the costs for an interest-only mortgage are usually higher than conventional loans. Lenders might also charge a certain percentage as fees.

There are, of course, a few risks associated with interest-only mortgages, the primary being selling the property if, at the end of the period, it is not appreciated and the original loan balance remains the same. While there are a few other risks associated with such mortgages, most of these have been needlessly hyped, and an overall examination shows interest-only mortgages to have more benefits than disadvantages, especially when one is functioning within limited funds.

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