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Interest Only Mortgages Are They Worth The Risk?

Jan 20, 2008
Interest only mortgages, without a suitable repayment vehicle or repayment strategy, carry a great risk and as such it is necessary to point out that this article and the information contained within it is in no way a recommendation. To arrange any mortgage on an interest only basis comes with an inherent risk. These risks are discussed within this article but any responsibility for arranging an interest only mortgage should be taken seriously by the mortgagee that is the borrower.

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.

Perhaps the most obvious way to reduce your mortgage cost is to simply borrow less. Why is this so? Simply, this is because if you borrow less, you have to repay less. For some people, borrowing less is not something they would consider an option because they want a particular property, which costs a certain amount. Therefore, they would not consider a cheaper property that would therefore result in them having to borrow less money. There is a solution to this problem that you can consider.

Interest only mortgages are just what they sound like. With interest only mortgages, all you pay on a monthly basis is the interest on the principal you've borrowed. This means that your monthly payments are going to be lower, but you should also know that you're not paying back any of the money you originally Broward to buy your home. This means that your monthly payment is going to be much lower, sometimes as much as 25% less. At least on paper, this saves you a lot with your monthly expenses.

However, when you acquire an interest only mortgage, your payments do not pay off any of the original principal you borrowed. In some ways, you're cheating the system with this, because your original principal is not going to go down at all. It will be outstanding for the entire time you're paying interest only. If you do this for the entire mortgage term, you will still owe the entire principal you originally borrowed at the end of that mortgage term.

For some people, there's a valid reason to do this. Perhaps they're getting an inheritance, or an investment is maturing at some future date. At that time, they're going to take that lump sum of money and pay off the principal with it. If this is true, then it's very valid to arrange an interest only mortgage because you know that you are going to be paying off the principal as soon as you receive your money.

There are some people that do arrange these mortgages with no prospect of repayment. Why do they do this? Well in a lot of cases they feel they have to, they feel that they have exhausted all the other methods of reducing the cost of the mortgage and this is the only way to secure a property that they feel committed to. To these people I suggest that they set themselves a 5 year review point when this comes around they should consider changing their mortgage over to a repayment one then. Hopefully they will be in a better financial position to do this, if they are not and do nothing about it they will have a mortgage outstanding at the end of the term. So at some point they are going to have to do something to ensure that it is repaid in some way.

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.
About the Author
Interest only mortgages can be high risk and confusing. Make sure you are aware of the facts by visiting MortgageRoute.co.uk Free independent mortgage brokers online.
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