05/10/2010 Data reveals that 4 out of every 10 homeowners are taking advantage of interest only mortgages. With an interest-only mortgage, borrowers have the option of paying each month only the amount of the interest that has accrued. Since borrowers aren't required to pay anything towards capital, less of each month's salary goes towards the mortgage payment. If you're considering an interest-only mortgage, here are five things to consider.
5. The benefits An interest-only mortgage frees up money because each month, you're only required to pay accrued interest on the amount of capital owed. That leaves you with more money to invest or spend elsewhere. The interest amount depends on whether the interest-only mortgage has a fixed or adjustable rate. If it's adjustable, the amount also depends on the current base rate or the standard variable rate set by your bank. Sometimes the interest amount can even be zero!
4 The drawbacks If you choose to repay only the interest amount each month, you'll still owe the full capital amount when the mortgage term ends. This is quite different from what happens with a repayment mortgage; each month the capital amount is reduced and so is the interest amount. At the end of the mortgage term, these mortgage holders are debt-free whereas interest-only mortgage holders aren't. Additionally FHA home loans are not eligible for interest only plans
3. The best way to pay off capital Saving money throughout the mortgage term is the best way to pay off capital. When saving via an ISA or other savings scheme, you'll have a lump sum of cash that you can then use to repay capital at the end of the mortgage term. Choose your savings plan wisely and make consistent payments and your money will grow, enabling you to reap even more financial benefits.
2.Is it right for me? An interest-only mortgage may make sense if your monthly income varies or you're unsure what your financial situation will be like in the future. The built-in flexibility lets you save as much as you can, when you can. If you expect to have more disposable income in the future, consider applying for an interest-only mortgage now. You always have the option to refinance into a repayment type of mortgage later on.
1 How to choose? When making any type of mortgage decision, talk with someone who has experience with different types of mortgages in order to find the lowest mortgage rate. Together you can decide the type of mortgage that makes the most financial sense based on your current and expected financial situation.
