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Thursday, September 08, 2005

What’s the Deal with Interest Only Mortgages?

Have you heard that commercial about interest-onlymortgages...the one where you’re told about what a wonderfulbenefit it is to have a low, low mortgage payment and all thewonderful tax write-offs you will receive?
Before you decide to buy now and pay later, that is pay “bigtime” later, take a moment to enlighten yourself a bit more aboutthese so-called “interest only mortgages.” Think about it for amoment. If you just pay the interest on your home, will you everstart paying on principal and will you ever earn any equity intoyour property?
By definition, a mortgage is a temporary, conditional pledge ofproperty to a creditor as security for performance of anobligation or repayment of a debt. Simplified, that means youborrow money from a financial institution and they essentiallybuy your house and you pay it back. How can this happen ifyou’re just paying interest? More accurately, interest-onlymortgages are a temporary reprieve for paying off a traditionalmortgage. You may actually be prolonging the inevitable andeventually making it even more costly to pay off your mortgage.
Far too many people are in debt way over their heads because ofinterest-only mortgages. They took advantage of attractive offersto buy now and pay later. With an interest only payment you’rekeeping the principal at minimum value while continuing to payinterest at 100%. With a more conventional mortgage you’d beslowly dwindling down the total interest amount.
Most interest-only payment schedules are offered on AdjustableRate Mortgages (ARMs), but they can also be found on a fixed ratemortgage. Interest-only payment periods almost never run for theentire term of the loan which is typically 15 or 30 years. Depending on the terms of your contract, you could be expected tostart paying on the principal in five, seven or ten years. Oncethe interest-only period ends, your monthly payment will go upbecause then you’ll be paying on both principal and interest.
Conversely, interest-only mortgages can be a good thing for somepeople. For those people wanting to purchase a bigger/betterhome for a lower down payment AND who anticipate moving withinseven years, the interest-only payment method may be the way togo. However, keep in-mind that in a "down" realestate market yougenerally won’t be building equity and making money by doing itthis way. The majority of the money made from investing in realestate comes from an increase in value to the home. The averageperson moves every seven years anyway. Gone are the days whenpeople stay in a home thirty years. Hence, if you anticipatemoving before you’ll have to start paying on the principal, thenan interest-only payment may be ideal for you.
There’s a great deal of fine print to any mortgage. Evaluateyour own goals; be vigilant when reviewing the terms on the loanyou’re considering before acting.

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