How Interest Only Mortgages Work
When you take out a
traditional
mortgage,
you pay the lender a monthly amount that's a blend of principal plus
interest. The principal goes to repayment of the money you borrowed.
The interest is what the financial institution charges for the use
of the money.
When you take out an interest-only mortgage, you pay only interest
every month for a fixed period of time -- usually the first 5 to 10
years. Then, depending on the term of your mortgage loan, you have
20 to 25 years to repay all of the principal and interest. You can
pay money toward the principal during the interest-only period, but
make sure your interest is recalculated on the new balance.
An
interest-only loan could be ideal
for you if you are short of cash but want to buy a home in
anticipation of an improvement in your financial situation.
Refinancing with an interest-only mortgage is an idea you might want
to consider if you are experiencing a temporary financial squeeze
-- if, for instance, you or your spouse has chosen to go back to
school, or one of you has decided to take a few years off with your
children. Paying only interest for a few years could help you to
stay in your current home, even though you can't make your
conventional mortgage payments for the time being.
You might also choose an
interest-only mortgage as a way of investing in real estate,
if you believe house prices in your area will rise in the next five
to 10 years. You could live in the house for that period, paying
only interest, and plan to sell it, pay off the mortgage and keep
the difference when the interest-only period expires.
