In an interest-only mortgage, the borrower only pays the interest on the loan for a set amount of time, often 5 to 10 years. During this time, the borrower makes no principal payments, therefore the loan sum stays the same.
Some borrowers may find interest-only mortgages tempting because the monthly payments are less than those of a conventional mortgage. Borrowers may be able to qualify for a greater loan amount or to purchase a more costly home as a result. Additionally, borrowers who anticipate a rise in their income in the future may find that interest-only mortgages are a smart choice because they will be able to afford higher payments once the interest-only period expires.
There are certain drawbacks to interest-only mortgages, though. During the interest-only term, the loan balance won’t change because the borrower isn’t reducing the principal. This means that over the duration of the loan, the borrower will be required to pay interest on the entire loan amount. Additionally, the borrower will be required to start paying both interest and principal after the interest-only period expires, resulting in significantly larger monthly payments.
The possibility of negative equity is another drawback with interest-only mortgages. The loan sum will remain the same as when it was first made, even if the value of the property drops while all payments are being made are interest. As a result, the borrower will be in debt for more money than the asset is worth.
It’s significant to remember that not all borrowers would benefit from interest-only mortgages. They work best for borrowers who can afford greater payments in the future, have a steady source of income, and have a well-defined plan for repaying the principal of the loan when the interest-only period is up. Borrowers who are uncertain about their ability to continue making larger payments may look into alternative mortgage products.
For some borrowers wishing to buy a home, interest-only mortgages can be a beneficial tool, but they have risks and drawbacks that must be carefully weighed before making a decision. It’s crucial to evaluate the potential advantages and disadvantages of an interest-only mortgage before deciding if it’s the best option for you.