Pros and Cons of Interest-only Mortgages
An interest-only mortgage is one of several financing options available to people seeking home loans. In this, rather than paying both the principal and the interest on the loan every month, you can make monthly payments on only the latter. The initial monthly payments are low for the first five or ten years of the term, and then later, as the premium will get amortized, the payments are significantly higher.
Advantages
Going for it seems to be an appealing financial option to many home buyers, especially if you are buying it for the first time. Since the initial payments are low, it is easier to get approved for a home loan for one thing and for another, it makes it possible to go for a property that would otherwise seem unaffordable.
Another favorable factor is that by paying only the interest in the initial period, you are able to invest the premium in businesses, savings, stocks, etc. If you invest wisely, it is possible that you will receive healthy dividends, and when the five or ten initial years of paying only interest are over, you can either pay off the remaining mortgage amount in a lump sum or go for a refinancing option.
Many people use the premium amount to fund retirement plans, college education plans, business ventures, pay off credit card bills, etc. You may also use the premium amount to pay off another, more pressing debt. This way you can ease your financial situation and free up your money to make only the higher payments on your mortgage later.
If your loan amount does not exceed the tax limitation, you can be eligible for tax deduction. This is another plus factor. It is also a good financing option for investors who are in the business of buying properties, in order to renovate and resell. This can work out well and bring you high-profit margins, only if you manage to sell the house for a higher amount than that of buying.
Disadvantages
These loans were very popular during the 1920s. A large number of people went for this alternative. They were confident of meeting the higher payments later; they could always refinance, and the way the economy was booming, they expected to receive higher wages and expected the value of their property to appreciate in the coming years.
In actuality, the exact opposite happened. With the Great Depression, markets crashed, property values dipped, and people lost their jobs. It is important to take a lesson from this. Before considering this option, you should thoroughly evaluate your future ability to pay the higher payments at the end of the period. While it is important to apply for a mortgage loan, it is wise to take into consideration the consequences that might arise, as well.
What will you do if your income does not increase as expected? Or if you lose your job? What if, for some reason, you have to sell your home before you’ve paid off the loan? That could mean financial loss for you. What if the property value depreciates instead of appreciating? Real estate prices are notoriously unstable. What seems to be a great investment right now could lose its value drastically a few years down the line due to rapid land development, type of neighborhood, natural disaster, etc.
Many people are just not good at investing or rather lackadaisical about it. Unless you are willing to educate yourself thoroughly on all related matters before you go for it, you might be better off going for some other financial plan for the same.
