Interest Only Mortgage Loans - Mortgage Loan

The Pros and Cons of Interest Only Mortgage Loan

Interest only loans are loans which enable you to pay interest only. Interest only mortgage loan help reduce your monthly payments because you don't have to pay principal for these kind of loans. Getting interest only loans has its advantages and disadvantages. You should examine these factors carefully before getting an interest only mortgage loan policy:

Pros:

1. Interest only mortgage loan help reduce your monthly payments. If you don't have a fixed salary, interest only payments enable you to reduce your monthly payments since you only pay the interest. If you have extra savings, you can also increase your payments against the principal. Increased payments against the principal decrease the required monthly payments since the amount of principal for which you pay interest has decreased.
2. Interest only loans allow you to customize your schedule of amortization.
3. Interest only loans enable you to purchase a more costly house with lesser monthly payments.
4. Interest only payments allow you to use your savings for other purposes.

The following are some of the disadvantages of interest only mortgage loans:

Cons:

1. Interest only loans do not accumulate equity for your house. As a result, you could be forced to sell your house or refinance the mortgage loan so you can pay off the interest only mortgage loan.
2. Interest only loans do not allow you to build up equity from which you can borrow against in the future with a second mortgage loan. Since you only pay interest in interest only loans, the balance of the loan does not decrease. Rather, you are forced to undergo debt-servicing just to be able to pay the required interest.
3. You may be forced to write a cheque to sell your house once it loses value. For example, you bought a house for $500,000 and you get a loan at an interest rate of 60% or $300,000. If you only pay interest, you'll constantly owe $300,000 for the house. If the house loses value and it only has a selling price of $300,000, you won't be able to get back your down payment of $200,000. Once the price of the house drops below $300,000, you may be forced to use pay out of your savings or write a cheque to get rid of the property.

Creating an online savings account is a good alternative to interest only loan policies. An online savings account enables you to pay regularly without making large amounts of withdrawals. As a result, your savings increase with the interest rates and your deposits add to the starting balance. Many online savings account policies use the compounded interest policy. This policy allows you to increase your savings and your balance. When looking for an online savings account policy, choose one that has high interest rates without requiring a minimum balance or deposit restrictions. You should also look for an online savings account policy that does not have a fixed term of deposit and enables you to have access to your savings anytime.