Building or owning a home is everyone's dream. The cost notwithstanding, this is one sign of success in life. With some financing options available in the market, the clients need to have all the required information to make the right choice.
This article will guide you on interest-only mortgages.
An interest-only mortgage is a loan borrowed from a bank that allows you to pay just the interest for the first few years. These first few years are known as the teaser period. The teaser period lasts between five to seven years. At the end of this period, your loan converts to a conventional mortgage in which the interest rate and payments may change.
From this point onwards the monthly payments must cover the interest and some of the principal. Such a scenario increases the payment by a large margin. In some cases, depending on the bank, the loan requires the borrower to pay off the whole loan after the teaser period. It is prudent that you check with your bank first.
Before the home buyer applies for a mortgage, he/she needs to consider two main things. The debt to income ratio and price vs. rent calculation. By understanding their debt to income ratio, the buyer can evaluate their buying options in the market by comparing the cost of buying vs. renting.
The debt to income ratio enables the customer to determine how much of their earnings they are going to spend on housing and all their monthly expenses. Keeping in mind fixed monthly expenses, the buyer can decide if taking a loan is feasible. Using the price vs. rent calculation the homeowner can now figure out if it's cheaper to rent or buy using estimates on the cost of the loan.
Like anything in the world, interest-only mortgages have both advantages and disadvantages as detailed below:
- The monthly payments are initially lower in comparison to a conventional loan. These payments enable the borrower to afford a more expensive home which they wouldn't have other side afforded;
- It offers the borrower flexibility. The borrower can use any extra income they get to reduce the principal. Such an action doesn't affect their standards of living.
- The greatest disadvantage is the fact that the monthly payment will increase once the teaser period has lapsed and the loan converts.
- The higher monthly payment is challenging when the borrower expects to finance the loan on the increase in salary or a new job. Failure to get the job or salary puts pressure on the borrower.
- Fall in price is dangerous for borrowers who plan to sell the house before the conversion of the loan.
Provision of the Mortgage
Banks and housing finance firms provide these mortgages in the US. They are spread out in all the states. The borrower needs to do due diligence before procuring the loan. Some of these firms are Lending Tree, J.G Wentworth, Sofi, Cross Country, Rocket Mortgage, Load Depot, AmeriSave, and RateMarket Place to name a few.