<-- Back to Current Category

Do You Know the Pros and Cons of Interest Only Mortgage?

By: Marie-Claire Ng, Sun Sep 17th, 2006

Has any lender ever told you the Interest Only Mortgage was like a double-edged sword? It can help you achieve your dream of owning a home more easily, but it also can create a financial hardship for those who don’t fully understand what’s involved.

In the attempt to lure potential homebuyers, the lenders have come up with various creative mortgage options. One of the more popular offers is the Interest Only Mortgage. As the name implies, with Interest Only Mortgage, the monthly payment will be applied to the interest portion only. In a traditional mortgage option, the monthly payment applies to both interest and principal, even though, in the early years, interest portion is much more than the amount paid to the principal.

Interest Only Mortgage has become more popular to new homebuyers for the following reasons: · Since the monthly payment is low, the savings can be used for personal spending, paying off higher interest debts, buying furniture for the new house, or even investing. · The interest paid to the Interest Only Mortgage is still eligible for tax write-off at the end of the year. · Some Interest Only Mortgages allow you to make a principal payment during the interest only period. This helps reduce your balance the following month which lowers your payment further.

However, Interest Only Mortgage is not for everyone. · Beware a potential prepayment penalty for the first 1-3 years imposed by some lenders. · You have to play the “catch up game” once you begin to pay the principal. The amount is much more since you didn’t pay during the interest only payment years. · Think twice before committing to an Interest Only Mortgage if it’s the only way for you to afford a house.

About the author: How to pay off your mortgage in 10 years or less and build lots of equity from your home? www.1a-refinance-home.com