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Interest Only Mortgages Are They Worth The Risk? |
By:
Chris Clare |
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Interest Only Mortgages Are They Worth The Risk?
Chris Clare
Interest only mortgages might sound like a good idea, but they carry great risk if they don't have suitable repayment plans set in place. This article is in no way a recommendation that you should get an interest only mortgage. Should you decide to take on an interest only mortgage, it is your sole responsibility to know everything you can about this type of mortgage. Inherent risks should also be taken seriously by you.
When choosing a mortgage there can be many different things which you have to weigh up beforehand, none least is that of the overall cost. When all said and done if you cannot afford the mortgage then the whole thing tends to be a bit of a none starter.
There are many ways to manipulate the overall monthly cost of a mortgage. You can choose a particular rate over another, such as a short discounted rate this will always be cheaper than a long discounted rate. The same also applies to fixed rates the shorter they are for, generally, the cheaper they will be.
To reduce monthly payments you can also change the overall term of the mortgage. If you have a repayment mortgage and you shorten the mortgage term then the monthly payments will increase. This is due mainly to the fact that the shorter you have to pay for the debt the more you will have to pay in order to completely repay it. The flip side to this is if you lengthen the term then the payments will reduce because, yes you guessed it, the longer you have to pay the lower the payments needed in order to repay the same amount.
The obvious way to reduce the cost of every mortgage is to borrow less. The reasoning behind this is simple the less you borrow the less you have to repay. That said many people do not have the ability to borrow less they are invariably set on a particular property and very few of us are able to put up a greater deposit than the one we have agreed to so another solution is needed.
Interest only mortgages are just that. These are mortgages wherein all you pay month-to-month is the interest on the principal you've borrowed. Now, of course, your payments are going to be lower by as much as 25%, but keep in mind that you aren't paying back any of the money you originally borrowed. And because your monthly payments are so much lower, this looks like it can save you a lot on your monthly expenses.
However you should understand that by doing this you are essentially cheating the system. You are supposed to repay the loan and to not do this will mean that the loan will remain outstanding for the whole duration of the debt and if nothing is done to rectify this situation then come the end of the mortgage the whole balance will still be due to the lender.
It is fair to say that there are some very genuine reasons to arrange an interest only mortgage one of the main ones is if you are expecting a lump sum of money in the future such as an inheritance or the maturity of an investment. In these cases it is more than fair and appropriate to arrange an interest only debt on the basis that you know were the money is coming from to repay it.
However, some people acquire interest only mortgages with no such resources in sight. Some people do this because they truly do not have the financial resources to pay a regular mortgage or are in financial difficulty, but still want the property they acquired. They arrange to have an interest only mortgage so that they can have the house they want. If this is your situation, I suggest you give yourself a time limit with your interest only mortgage. At the end of that time, say five years, you set yourself the goal of changing your mortgage to one that is traditional, where principal is paid along with interest when you make your mortgage payments. If you don't make a plan like this, you're going to owe the entire principal at the end of your mortgage term. Therefore, you need to make sure that the principal is going to be repaid at some point if you wish to stay in your home.
So in summary if you feel you need to do an interest only mortgage arrange it with your eyes wide open. Make sure you have some plan to repay it, even if that plan is to change the debt in years to come, there needs to be some idea in place to make this financial decision a sound one.
Interest only http://www.mortgageroute.co.uk) mortgages can be high risk and confusing. Ensure you know the facts by visiting MortgageRoute.co.uk Free http://www.mortgageroute.co.uk) independent mortgage brokers online.
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Article Source: http://www.statssheet.com/articles/article67788.html |
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