Should you get an interest only mortgage?

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Interest-only mortgages may offer flexibility to homebuyers, but they may not be suitable for everyone. (iStock)

When looking for a home loan, you may want to consider getting a mortgage with interest only. This type of mortgage does not require you to pay the principal first. Instead, you simply pay against the interest on the loan.

This is a big difference compared to the traditional 30-year fixed mortgage, which amortizes the principal and interest over the life of the loan. If you are interested in getting an interest-only loan, the tips below will help you decide if it is right for you.

To explore loan options, visit Credible compare current mortgage rates and lenders.

How does an interest rate mortgage work?

Conventional loans require you to pay interest and principal for a specified period, usually 15 or 30 years. At the beginning of the loan term, most of the loan payment goes to interest payments. As you near the end of a 15 or 30 year mortgage, most of your payment goes towards the balance of the loan principal.

An interest-only mortgage allows you to make payments on the loan against interest during the first part of the term of your mortgage. For example, you can only make interest payments for the first five to ten years. Interest-only loans can have fixed or adjustable mortgage rates. After the original maturity of interest only, you will continue to pay the loan with both principal and interest amortized.

An interest rate mortgage is a type of inappropriate home loan. This means they are not protected or insured by Fannie Mae or Freddie Mac. Interest-only mortgages are less common than other types of home loans, and not all financial institutions offer them. You can contact Experienced loan officers Credible to get answers to your questions about mortgages, including more details on how an interest only mortgage works and what types of mortgages are available to you.

4 STEPS TO CHOOSE A MORTGAGE LENDER

Should you get a mortgage with interest only?

Obtaining a home loan at interest only may be beneficial for some buyers, but there are some special considerations to keep in mind. It is helpful to weigh the pros and cons to decide if it is appropriate.

Pros of a mortgage only at interest:

  • Lower payouts: Because you initially pay only in interest, your monthly payments may be lower compared to a traditional 30-year mortgage.
  • Save cash: Lower monthly payments can leave you with more cash to invest or spend on home renovations.
  • Payment of the main balance is optional: Although you are not required to pay anything on the principal balance of your loan during the interest-only period, you can do this to reduce your debt.
  • Potentially easier qualification: Since interest-free mortgages are not subject to the relevant lending rules, lenders can set their own rules for approving borrowers.

Cons of interest-only mortgages:

  • More expensive: An interest-only mortgage may not affect what you pay for the down payment or closing, but you can pay more interest over the life of the loan.
  • Slowly build up capital: Since you do not pay anything to repay the loan principal, you do not increase your equity by making payments during the interest-only period. On the positive side, the rise in house prices increased equity by 16.2% in 2020. according to CoreLogic… It can help you build equity capital even if you don’t pay the principal.
  • Higher payouts later: After the end of the interest period, your monthly payments may increase significantly.
  • Air paymentsA: Depending on how your mortgage loan is structured, you may be liable for one major payment at the end of the loan term.

HOW TO KNOW IF YOUR HOUSE IS TOO EXPENSIVE

Are you eligible for an interest only mortgage?

Since interest-only mortgages are not supported by the government, lenders can set their own standards for approval. For example, lenders may accept borrowers with lower credit ratings if they have a stable monthly income, significant savings, or higher net worth.

But is an interest-free mortgage right for you? You can consider this type of home loan if:

  • You are buying a house as a short term investment
  • You need cash to pay for your home renovation or renovation.
  • You are planning repay a mortgage ahead of schedule
  • You need a temporary mortgage option because you are buying a new home and selling the one you currently live in.
  • You are getting a divorce and need a short-term mortgage to buy out your spouse who owns the property.

You may also consider getting an interest-only mortgage if you are confident that you will refinance a regular loan in the future. The trustworthy one can help you compare several mortgage lenders at once and see loan options in just a few minutes

DO I HAVE TO REFUND MY MORTGAGE FOR A DEBT CONSOLIDY?

Final thoughts

There are many pros and cons, and an interest rate mortgage is not for everyone, but it can offer great benefits for those who qualify. And getting these loans would be easier as they are not matched with the loans and are supported by Fannie Mae or Freddie Mac. Whether you are looking for lower monthly payments, easier qualifications based on credit history, or short-term cash savings, an interest-free home loan may be the right mortgage option. You can use Online mortgage calculator Credible and more and pre-qualify today.

Have a financial question but don’t know who to contact? Write to the Safe Money Specialist at moneyexpert@credible.com and your question can be answered by Credible in our Money Expert column.

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