Deciding on a mortgage option is a daunting experience even for the most seasoned loan consumers. Learning the basics can make a real difference in how you view your mortgage options.
Terms, conditions and options of mortgages can be confusing. The Interest-Only mortgages for example are not actually an interest only mortgage but are really a interest only payment method. There is no such thing as an interest-only mortgage, because eventually you’ll have to pay the loan principal. The interest only payment method can be combined with any other kind of traditional mortgage. But keep in mind that not paying any principal now means that you’ll pay more interest later.
Interest-only payments do not run for the entire term of the loan, not even when used in conjunction with a fixed-rate mortgage. Interest-only payments expire at the end of a set number of years. After the interest-only period ends, your payment will rise to include both principal and interest.
Interest-only payment mortgages originated from the more fluid and inventive jumbo mortgage markets. Jumbo mortgages are loans for amounts larger than Fannie Mae and Freddie Mac can purchase. They were targeted by people who had other ideas for the money that would normally go toward the principle in other types of mortgage loans.
Most interest-only payment schedules are offered on Adjustable Rate Mortgages (ARMs), but can also be used with fixed rate mortgages (FRM). They’ve entered the mainstream mortgage loan market over the years and so that they are available to just about all borrowers.
Interest-only payment options began to be offered to the general public as a way to borrow more money while not increasing the monthly payment. Not repaying principal is also not building any equity in your home through debt retirement. That means that an interest-only borrower is counting on market appreciation to help own more of the home.
In easy terms, what does this mean to the interest-only loan consumer? It’s dangerous to not reduce the balance. If prices should fail to increase during the interest-only period, and if you have to sell the home, you could be held responsible for thousands of dollars in sales costs.
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