how does an interst only mortgage work?

Question

I heard you can get a 25 year mortgage were you just pay interest, but what happens then, do you spend anothe 25 year paying for the house! I dont get it!

Answer 1

This is an arrangement where you're only paying off the interest on the loan.

Unlike a standard mortgage you are not paying off the capital debt part of the mortgage.

So the mortgage costs you less... which means you can borrow more.

But the idea that you can pay less is only a short term solution because you are supposed to set up a side by side investment


Ideal for short term pay to let houses and sell house off when you're finished to pay off capital.

Answer 2

There are several variations of the interest only mortgage, the two major ones are these:

a) After a certain number of years, (ten, for example) you then start paying the loan like a regular mortgage, principal and interest.

b) After a certain number of years, the entire balance is due.

Most people sell or refinance their home within about five years, whether they plan to do so when they buy it or not. Most of the time the home is worth more than they paid for it by then. The idea is to keep the payments low in the meantime, either planning to be earning more in the future (because of Inflation if no other reason) or to put the money you would have been paying on principal to better use.

That's where a lot of people get disappointed (if not into trouble) with these, sometimes the value doesn't go up, sometimes their pay doesn't go up, and you have to give serious thought to what that better use for the money really is.

It can be a good idea for a lot of people, but "it ain't necessarily so."

Answer 3

The basics of an interest only mortgage (which I think you understand): you pay the interest every month, to keep the amount of capital constant. You don't decrease the overall amount you owe.

Benefits of an interest only mortgage:
1. If you know your salary will increase. So at the moment, on a repayment mortgage, you can only afford a small place. In 2 years time you'll be able to afford a much better place. One option is to go interest only for 2 years, and then switch to repayment. So you can get the better house without having to move house an extra time.

2. House price increase. If you take out a £150k mortgage for a £150k house, and just pay the interest, then by the time you sell it in 8 years time the house will probably be worth £175k. So you've made £25k by paying interest only mortgage rather than paying rent.

3. Other repayment option. You spend a certain amount of your money on the interest mortgage. Your other spare money you maybe invest in some sort of policy, or maybe invest on the stock market. Assuming you get a higher return rate on the stock market than the rate of your mortgage, this works out better financially for you. But there is obviously lots of risk with the stock market and you could lose the money you invested.

Answer 4

I have an interest only loan it's a 5/25 I/O on one of our rental properties. The 5/25 I/O means that the loan is fixed for 5 years & adjusts for 25 and the first five years of the loan I'm only making interst only payments.

Example:
The loan amount is: $304,000
The rate is 7.00%
Term of the loan is: 30 yrs
Monthly payment is: $2022.52
If the loan was interst only the payment would be: $1773.33

People get an interest only payment for several reasons. Some people get them because they know they'll be making more money in a few years after they graduate or after they get promoted at work so they take the I/O option. Some people get an I/O loan because their credit score is not that high and they have a high interst rate so they want to make as little payments as possible because they're planning to refinance when their score goes up. Others (like myself) get an I/O loan because we plan to rent out the property and want to make a profit every month or it's a property that we're living in that we don't plan to keep for more than a couple of years.

Explain to the person that is doing the loan for you what your long term plans are. The job of your Loan Officer or Mortgage Broker is to get you the best loan that suits your needs.

Good luck!

Answer 5

the idea is that your monthly payments is based on the interest generated from the loan.

you will still have the capital to pay at the end of the mortgage

these kinds of mortgages are common amongst the elderly as they let them ofset against the value of their house usually for building works like an extension,

if there is an outstanding mortgage on the property it may make it so that it passes under the limit for inheritence tax

however in all cases it is best to consult a financial advisor as they will take your current circumstances into account

Answer 6

When your mortgage is due, you still owe the same amount. You haven't paid anything on the mortgage itself. This kind of mortgage has gotten a lot of people in trouble.

Answer 7

It doesnt work! Its like paying rent to the bank. When you finish the payment term you still owe what you borrowed. Only take one out if thats all you can afford then change to a repayment as soon as.

Answer 8

If you are looking for a home but you know that paying a mortgage will be a severe drain on your finances, then perhaps you should look at getting an interest only mortgage. If you are unsure about what an interest only mortgage is and how it can help you, then this article can provide you with some useful tips on getting an interest only mortgage.

What is an interest only mortgage?

An interest only mortgage is a mortgage where you only pay back the interest on the loan, and none of the capital debt is repaid directly. Once you get to the end of the mortgage term, you will pay back the capital payment in full.

How do you pay back the capital?

Although you don’t pay the capital back directly through your monthly mortgage payments, you indirectly pay for the capital. You pay for the capital through an investment fund or other lump sum. So, instead of repaying your mortgage capital each month through mortgage payments, you may monthly payments into an investment fund. Apart from investment funds, the other main ways to pay off the capital are:

· Savings
· Switching to a repayment mortgage
· Another lump sum such as inheritance

What is the advantage of this?

Although you are still making monthly payments into an investment fund, these payments are likely to be a lot lower than the monthly mortgage payments you would pay on a normal repayment mortgage. Your interest only payments will be low each month and so if you cannot afford to pay a lot each month at the moment, an interest only mortgage might be a good idea. Also, the idea is that the money you put into the investment fund will mature and leave you with enough money to pay off the capital at the end of the mortgage term as well as leaving you with some extra money.

Are there risks?

Of course, there are a number of potential risks of getting an interest only mortgage. The first problem is that if you are hoping to pay off the capital by switching to a repayment mortgage later on, you will be paying back a lot more money than if you started on a repayment mortgage. Although you may find it hard right now, getting a repayment mortgage to start with might be a better option. However, the main risk involved with interest only mortgages is that the investment fund you set up will not be enough to pay back the capital at the end of the mortgage term. If you cannot pay back the capital then you could end up losing your home at a time in your life that it will hit you hardest, such as at retirement age.

If you are going to take out an interest only mortgage, make sure that the funding method you use is safe, and that you have contingency plans if the fund is insufficient to pay back the capital. If you do this, then getting an interest only mortgage can be a great way of keeping your payments low whilst you improve your income.

If you are looking for a home but you know that paying a mortgage will be a severe drain on your finances, then perhaps you should look at getting an interest only mortgage. If you are unsure about what an interest only mortgage is and how it can help you, then this article can provide you with some useful tips on getting an interest only mortgage.

What is an interest only mortgage?

An interest only mortgage is a mortgage where you only pay back the interest on the loan, and none of the capital debt is repaid directly. Once you get to the end of the mortgage term, you will pay back the capital payment in full.

How do you pay back the capital?

Although you don’t pay the capital back directly through your monthly mortgage payments, you indirectly pay for the capital. You pay for the capital through an investment fund or other lump sum. So, instead of repaying your mortgage capital each month through mortgage payments, you may monthly payments into an investment fund. Apart from investment funds, the other main ways to pay off the capital are:

· Savings
· Switching to a repayment mortgage
· Another lump sum such as inheritance

What is the advantage of this?

Although you are still making monthly payments into an investment fund, these payments are likely to be a lot lower than the monthly mortgage payments you would pay on a normal repayment mortgage. Your interest only payments will be low each month and so if you cannot afford to pay a lot each month at the moment, an interest only mortgage might be a good idea. Also, the idea is that the money you put into the investment fund will mature and leave you with enough money to pay off the capital at the end of the mortgage term as well as leaving you with some extra money.

Are there risks?

Of course, there are a number of potential risks of getting an interest only mortgage. The first problem is that if you are hoping to pay off the capital by switching to a repayment mortgage later on, you will be paying back a lot more money than if you started on a repayment mortgage. Although you may find it hard right now, getting a repayment mortgage to start with might be a better option. However, the main risk involved with interest only mortgages is that the investment fund you set up will not be enough to pay back the capital at the end of the mortgage term. If you cannot pay back the capital then you could end up losing your home at a time in your life that it will hit you hardest, such as at retirement age.

If you are going to take out an interest only mortgage, make sure that the funding method you use is safe, and that you have contingency plans if the fund is insufficient to pay back the capital. If you do this, then getting an interest only mortgage can be a great way of keeping your payments low whilst you improve your income.

Answer 9

hi if you would like any mortgage advise or would like a quote to see how much it will coat email me on [e-mail]

Answer 10

You get it. That's what happens. There are no free houses. There is a baloon payment due.