Interest Only Mortgages Are They A Good Thing Or A Bad One?

Interest only mortgages, without a suitable repayment vehicle or repayment strategy, carry a great risk and as such it is necessary to point out that this article and the information contained within it is in no way a recommendation. To arrange any mortgage on an interest only basis comes with an inherent risk. These risks are discussed within this article but any responsibility for arranging an interest only mortgage should be taken seriously by the mortgagee that is the borrower.

Before you choose a mortgage, you have a lot of decisions to make. Not least among these is what it's going to cost you. If at the end of everything, you can't afford the mortgage is chosen, then what you've done is simply waste time.

There are many different ways to adjust what your overall monthly mortgage payment is going to be. For example, a short discounted rate is always going to be cheaper than a long discounted rate. The same holds true for fixed rates. The shorter their repayment period, the cheaper they're going to be for you.

To reduce monthly payments you can also change the overall term of the mortgage. If you have a repayment mortgage and you shorten the mortgage term then the monthly payments will increase. This is due mainly to the fact that the shorter you have to pay for the debt the more you will have to pay in order to completely repay it. The flip side to this is if you lengthen the term then the payments will reduce because, yes you guessed it, the longer you have to pay the lower the payments needed in order to repay the same amount.

Perhaps the most obvious way to reduce your mortgage cost is to simply borrow less. Why is this so? Simply, this is because if you borrow less, you have to repay less. For some people, borrowing less is not something they would consider an option because they want a particular property, which costs a certain amount. Therefore, they would not consider a cheaper property that would therefore result in them having to borrow less money. There is a solution to this problem that you can consider.

Interest only mortgages are exactly what they appear to be, mortgages were all you pay to the lender is interest. Due to the fact that no consideration is being made to repaying the debt the overall monthly cost can be significantly lower than that of a similar repayment loan, in some cases it can be upwards of 25% cheaper and when buying a home that can be a lot of money to potentially save on your monthly outgoings.

However, when you acquire an interest only mortgage, your payments do not pay off any of the original principal you borrowed. In some ways, you're cheating the system with this, because your original principal is not going to go down at all. It will be outstanding for the entire time you're paying interest only. If you do this for the entire mortgage term, you will still owe the entire principal you originally borrowed at the end of that mortgage term.

For some people, there's a valid reason to do this. Perhaps they're getting an inheritance, or an investment is maturing at some future date. At that time, they're going to take that lump sum of money and pay off the principal with it. If this is true, then it's very valid to arrange an interest only mortgage because you know that you are going to be paying off the principal as soon as you receive your money.

However, some people acquire interest only mortgages with no such resources in sight. Some people do this because they truly do not have the financial resources to pay a regular mortgage or are in financial difficulty, but still want the property they acquired. They arrange to have an interest only mortgage so that they can have the house they want. If this is your situation, I suggest you give yourself a time limit with your interest only mortgage. At the end of that time, say five years, you set yourself the goal of changing your mortgage to one that is traditional, where principal is paid along with interest when you make your mortgage payments. If you don't make a plan like this, you're going to owe the entire principal at the end of your mortgage term. Therefore, you need to make sure that the principal is going to be repaid at some point if you wish to stay in your home.

So to summarise, if you really must take out an interest only mortgage, you should do so with full knowledge of what that entails. You must know all of the pitfalls and drawbacks inherent in interest only mortgages. If you are not receiving a lump sum of money during the mortgage term whereby you can pay off the entire loan amount at one time, you should have a goal to begin to pay principal on the mortgage after a period of time along with the interest. You must do one of these two things if your decision to acquire an interest only mortgage is to be a smart one.