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Cash Flow Control With Interest Only Payment Mortgages
By John R. Blakefield
Another option for a mortgage? You shouldn't be so surprised. Interest only payment mortgages can get you into a home.
There are so many options for people to buy a home today. The financing continues to get even more creative as lenders continue to help as many people as possible get into a new home. This can be great from a quick glance, but you must be careful not to get into a situation that the mortgage is too creative for you to pay every month. Many people go into a deal thinking they are doing the right thing for their situation, but only falter on payments because it is just too much money and the equity is being stripped from the home!
Regarding the normal financing, you have the options of adjustable rate mortgages, which have an interest rate that changes the monthly payment every few years depending on the terms of the mortgage, and fixed rate mortgages that have a steady interest rate throughout the entire length of the life of the loan, and of course the more risky balloon mortgage which allows you to pay a low monthly payment, if one at all, and then pay off the debt at the end of the life of the loan in one large lump sum.
The creativity comes in by adjoining two types of mortgages. For example, you may have a split mortgage where for the first 5 years of a loan you have a straight fixed rate mortgage, but then after those 5 years, you move into a fluctuating, less stable adjustable rate mortgage. Lenders will mix and match, combine and separate to negotiate all terms regarding a mortgage.
The only way to be certain that a certain mortgage is right for you is to calculate the monthly payments and total expenses, including all fees and the possibility of a prepayment penalty. And watch out for those prepayment penalties! They can only charge them if you agree to them, so be sure to read all fine print carefully to see how much a prepayment penalty really is. If you catch it and it was not discussed, be sure to have a talk with your lender to get the terms corrected.
Interest only payments allow you to pay only the interest on your mortgage for the first few months, usually keeping the monthly payment very low. This can allow you to control your cash flow in the beginning, so that buying a home isn't such a huge shock to your finances.
(You should, however, be prepared to buy a home before you do it so hopefully it won't be a huge shock to your finances.)
This additional cash flow can be used for other things such as paying off consumer debt or addressing unforeseen expenses such as medical bills or a pay cut.
During the interest only payments, which are lower than what would be your normal monthly payment, you are not paying anything towards the principal- the entire loan amount previously agreed to by you and the lender. However, you can make a principal payment in which your next interest only payment would be based on a lower principal amount.
Now, the interest rate can still be adjustable or fixed depending on the terms. I am sure you will find lenders that will be creative with this as well.
Interest only payment mortgages are not good for those who wish to build the equity quickly in their home. This is for people who need to control their cash flow or have other reasons as to why they should not pay any principal payments. However, it is still an option and maybe it is just what you are looking for. Always be clear on the terms before you agree to any financing.
About the Author
John R Blakefield is a mortgage and real estate specialist. For more information, articles, news, tools and valuable resources on home mortgages or investment loans, refinancing, debt solutions, visit this site: http://www.scourtheweb.com/mortgage/.
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