One of the most popular mortgages on the market nowadays is better known as interest only mortgages. Actually, over one third of all new mortgages in the United Kingdom are interest only mortgages. These mortgages allow the borrower to pay interest for a specific time.
Instead of paying interest rates for the complete length of the repayment period that is apparent with traditional mortgages, interest only mortgages will only require you to make interest payments for a much shorter time. Traditional mortgages are usually amortized from anywhere from 25 to 30 years, which means that you will be making interest payments for that amount of time. Interest only mortgages are known to help people buy more expensive and larger houses in better parts of the city.
Understanding Interest Only Mortgages
For example, take for instance a traditional mortgage for a house valued at 250,000 pounds that is amortized at an interest rate of 6.35% for 30 years. The total monthly payment, including interest would come out to be a little over 1,555 pounds. But if you opt for an interest only mortgage, taking into account the same values and conditions of the previous example, you will only have to make monthly payments of almost 1,323 pounds, which means that you will be saving at least 232 pounds a month.
Benefiting from Interest Only Mortgages
Now, suppose that if you are willing and able to make the 1,555 pounds a month payment on your mortgage. You would be better off by opting for a interest only mortgage because you would be able to get a house that is worth 294,000 pounds, which is more than what you would have gotten with a traditional mortgage. In short, interest only mortgages have a number of great advantages that will help you afford and buy expensive and better homes, as compared to traditional mortgages.
In actuality, interest only mortgages have actually brought a lot of hope for the real estate market as a whole because there are more people now in the market looking for homes, since way back before the recession. Now that you know the advantages and benefits of interest only mortgages, it is important to shed some light on the downsides of these types of mortgages. Firstly, they have adjustable interest rates, which simply mean that changes in the market interest rates will be applied to your mortgage. This in turn, can lead to higher interest payments and more difficulty in managing your payments.
Another major drawback of interest only mortgages is the feature of limited term. This refers to the fact that you will only be allowed to pay the interest on the mortgage for a limited number of years. Most commonly, these types of mortgages have either 5 or 10 year interest only periods, which means that after this time expires you will have to start making the monthly payments that includes the principle amount.
The payments are much higher after the interest only period expires because the remaining amount of the mortgage will be amortized over a shorter period. In the end, depending on how well you can manage your financial situation for the long run will help you decide whether you should opt for interest only mortgages.
