Interest Only Mortgage
The first thing to note with interest only mortgages is not to
be mislead by the name. There is actually no such thing as an
interest-only mortgage, because eventually you'll have to pay
the loan principal as well. What you're really getting is an interest-only
payment scheme, which can be combined with any type of traditional
mortgage.
Your monthly repayments to the lender consist simply of the interest
that you owe throughout the mortgage term, and you pay back none
of the outstanding debt until the end of the mortgage term.
With an interest-only mortgage, your monthly repayments are made
up of three parts: interest on the capital you owe your lender;
life insurance; and a contribution to an investment plan designed
to pay off the outstanding capital at the end of the mortgage
term. An interest-only mortgage will generally work out slightly
cheaper per month than a repayment mortgage, but is inherently
more risky - there is no guarantee that the investment plan you
choose will generate enough capital to pay off the outstanding
debt at the end of the mortgage term.
In the early years of a standard mortgage, the interest takes
up about 95 cents of each dollar paid to the lender. The standard
payment on a 6%, $100,000 loan is about $600; of that, $500 is
interest, "saving" you $100 per month. Not paying any
principal now means that you'll pay more interest later. Interest-only
payment mortgages aren't a new offering. Rather, like many innovative
schemes, they originally grew out of the less-rigid and more inventive
jumbo mortgage markets. As such, they were typically aimed at
well-heeled clients who preferred to utilize what would have been
the principal portion of their payment for other, hopefully more
productive investments.
Most interest-only payment schemes are offered on Adjustable
Rate Mortgages (ARMs), but they can be found on a fixed rate mortgage
(FRM) as well. They've also entered the mainstream, so that they're
available to just about all borrowers. The loans you'll find will
most likely be sold to a secondary market dealer.
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