Loans in the Greater Boston Area can be classified into two categories: interest-only loans and amortizing loans. In the first category, for a specified period of time, you will be required to pay the mortgage lender only the interest on the loan amount borrowed. In the second category, you will be repaying both the initial amount borrowed (the principal) and the interest.
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What is an interest-only mortgage loan?
In such a loan, for the first few years you will be required to pay only the interest on the loan. Once this period of interest-only payments is over, you will have the option of either repaying the loan amount or (with some lenders) converting the interest-only mortgage into an amortizing loan. Other lenders offer a mixed version of the loan, wherein the first few years you will pay only the interest, after which you will pay an increased amount in order to repay the principal.
Interest-only mortgages have a number of negatives, making these loans a good option only for a certain type of home buyer.
Negatives of an Interest-Only Mortgage Loan
- No equity: Since you are only paying the loan interest, you will not be building any equity whatsoever on your house during the interest-only-payment part of the loan.
- No refinancing: Since you have no equity in your house, you will be extremely hard pressed to find a lender willing to refinance your loan.
- No selling: Again, because of no house equity, you do not own the house. You cannot sell it.
- Higher monthly payment: At the end of the interest-only period, you will have a shorter span to repay the principal. This means a much higher payment during the amortization period.
- Higher interest rate: Because of the inherent risk the lender faces by providing such a loan, the amount of interest charged on the loan will be higher than a normal amortizing loan.
Positives of an Interest-Only Mortgage Loan
- Initial savings: Since you will be paying only the interest initially, you will save quite a bit. This money can be reinvested in other avenues of your choice.
- Payment flexibility: If you find that your current income is a bit low, but you expect an increase in pay in the near future, this loan will allow you to make a smaller payment initially and follow it up with higher payments when you have the ability to pay more.
An interest-only mortgage loan is perfect for a person with irregular income, but with high potential for increase in salary, who has enough discipline to pay the increased monthly payments after the initial period of the loan. Before you decide that an interest-only mortgage loan is the best option for you, do the math thoroughly. Consider all other options, only then investing in such a loan, additionally planning ahead to start repaying the principal as soon as possible.