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If you take an interest only mortgage out on a home, you only make payments on the interest on the note. This is a common short-term situation, because when you are done with the note, you haven’t made any progress against the principal. You’re still the owner according to the deed, but you’re not making any headway toward building up equity in the home. When you get to a point where you can start to make principal payments on a regular basis, it’s time to consider an interest only mortgage refinance. Understanding how these types of loans work is an important part of making your real estate purchase decision.
Interest Only Mortgage Canada
What type of borrower should think about an interest only mortgage? If you want to get into a more expensive house, are comfortable with the fact that you will need to sell the house relatively soon if you don’t qualify for refinancing for a loan that also pays for principal, or if you want to invest the money you would be putting into principal somewhere else and believe you can get a much better yield somewhere else, then an interest only mortgage just might be for you.
Are there advantages to interest only mortgages? While you are in the interest only loan, your monthly payments are obviously lower than they would be if you were paying for interest and principal. Your qualification amount is higher, because you’re only paying the interest portion, and so you can buy a bigger or more lavish home. You shouldn’t do this if you don’t have the extra money on hand, but if you do, you can sink that money into other investments so that the returns come in before the refinancing time comes.
Interest Only Mortgage Refinance Rates
Are there drawbacks to interest only mortgages? This type of financing also has some disadvantages. If your interest only mortgage is an adjustable rate mortgage (ARM), if the Interest Only Mortgage Rate go up, your payments will too. Rates are still at historical lows, but analysts keep predicting that they will be working their way up over the next few years. If you spend your extra money rather than invest it, then you’re not getting that financial advantage you had planned. A lot of people find that when it comes time to pay principal on the note, they can’t afford it, and so they have to sell the house at a disadvantage. People who start with an interest only loan thinking that their income will increase over time find that the increase does not come, and so they have to sell quickly as well.
Interest Only Mortgage Lenders
If you have gotten into an interest only mortgage and need refinancing, but you are having a difficult time finding a bank to approve your loan, Amansad Financial has relationships with private lenders, brokers and other funding sources that can help you stay in the house.
Obviously, if you can’t afford principal payments, you will want to consider downsizing to a property that you can afford, but if you have the assets in place to pay for your larger mortgage, Amansad Financial can help you find the right lending partner to keep you in the home of your dreams. Bankruptcy does not have to mean that you spend the rest of your life renting a small apartment. While there are some more hurdles that you will have to clear to get refinancing approval, you can still pursue your financial dreams, as long as you establish discipline and settle your accounts on time. If you are considering filing a Consumer Proposal or have already filed one, and your mortgage is one of the reasons why you need to start trimming debt, talk to one of our refinancing experts at Amansad Financial. We will take a look at your specific situation and make a recommendation as to your best course of action. Many people fall behind on their debts, so don’t let that stop you from making sound financial decisions that will affect your future.
Interest Only Mortgage Option
Just like the name says, an “interest only mortgage option” loan allows you to start the first few years of your mortgage by paying only the interest portion. This keeps your initial payments lower. When you incur a traditional mortgage, both principal and interest comprise your monthly payments. The portion dedicated to the principal pays down the amount that you initially borrowed, while the portion dedicated to the interest pays your Interest Only Mortgage Lenders for the privilege of using their money to buy your house. In the case of an interest only loan, you only pay the interest portion for the first few years. At that point, you start paying both principal and interest, which means that your payments jump up at a specific point in time.
Interest Only Mortgage Loans
This sounds like a lifesaver for people who want to get into an expensive house and plan to make more money by the time the larger payments come due. It also is a dream if you’re looking to flip the house before the interest only period ends, leaving you with fewer dollars out of pocket. You don’t end up with as much equity from the purchase, but you have that cash in hand instead, and you can be earning money on it.
Interest Only Mortgage Options Pros and Cons
Before you agree to this type of loan, though, it’s worth considering the benefits and drawbacks of this type of financing.
First, let’s look at the disadvantages of an interest only mortgage loan.
Even at the end of your interest only period, you still have not gained any equity in the home. You only have the equity that you put in with the down payment. Unless the home value has increased, you’re right where you were, and if the value has declined, you could be in trouble — you could be what is called “upside down” in your mortgage, owing more than the house is worth.
When the principal payments begin, you have less time to make those payments, which will make those payments higher than they would have been with full amortization.
Now, let’s look at the advantages of the interest only financing option:
- If you’re wanting to flip properties in a real estate market where prices are on the rise, you can get in and out for less cash.
- You get to keep the cash you would be spending on principal during those first few years and invest it or spend it as you choose.
- If you’re having difficulties keeping up with the conventional mortgage on your existing home, switching to an interest only loan allows you to build up some breathing room before you have to start paying on the principal again.
- If you want to get that dream home that’s a little beyond your price range, the interest only loan lets you get in sooner while you build your income to meet the coming increase in payments.
So for investors, or for people who know they’re only going to be in the house for a short time, an interest only loan can be a smart choice. If this is the home you plan to live in until you and your wife have grandchildren and retire, and you don’t anticipate a drastic change in income a few years down the road, then you might look at a more traditional loan.
For answers to questions about Interest Only Mortgage Options and your personal lending situation, give Amansad Financial a call. Our mortgage specialists will be happy to take a look at your options with you.