Interest only mortgages are a relatively new phenomenon in the re-financing industry as well as the home buying industry. While the appeal of an interest only mortgage is typically a greater monthly cash flow, this increased cash flow can come with a hefty price tag. In exchange for more cash flow each month, the homeowner may be sacrificing the ability to obtain a fixed rate mortgage as well as the ability to build equity. This article will further examine these features to provide the reader with more information on the subject of interest only mortgages.
Greater Monthly Cash Flow
The one main advantage for many homeowners in an interest only mortgage is the ability to increase monthly cash flow. Homeowners who re-finance by utilizing an interest only mortgage will likely have more money available each month because they will only be paying interest on their mortgage initially. The reduction of the principal payment can make it easier for the homeowner to either afford a larger house or have the ability to live more extravagantly on their budget. However, there is often a significant price to pay for these types of re-financing options.
While interest only loans may not be ideal, they can be beneficial in the situation where the homeowner is having a great deal fulfilling his monthly obligations. In this case, the homeowner may be willing to sacrifice an overall financial loss for the ability to continue to pay monthly bills in a timely fashion.
Unknown Risks of an ARM
Interest only re-finance loans are typically offered with an adjustable rate mortgage (ARM) this means the interest rate is not fixed and may fluctuate with the rise and fall of the prime index. This risk can be quite costly for the homeowner if the interest rate rises significantly. There is usually a cap placed on the amount, in terms of percentage, the interest rate can rise in a certain period but this can still be a very costly mistake for the homeowners.
An ARM re-finance option with an interest only component may be worthwhile in some situations. For example if the homeowner has a hybrid mortgage which features a fixed interest rate during the interest only portion and an ARM during the principal and interest portion of the loan they might benefit from this situation if they do not plan to stay in the home for longer than the interest only period. This period may vary depending on the lender and the circumstances. Homeowners who plan to sell the house before the interest only period ends and the ARM period begins enjoy the benefits of lower monthly payments and the security of fixed interest rates before they ever have to worry about repaying the principal or dealing with the varying interest rates.
No Equity in the Home
Another disadvantage to the interest only re-finance loans is they do not allow the homeowner to build equity in the home during the initial period where only the interest on the loan is repaid. This can be a problem for homeowners who are looking to profit through the sale of their home. These homeowners may find the participation in an interest only re-finance has had a damaging effect on the profit they are able to generate from the resale of their home.
In Interest Only Mortgage, you pay only the interest on each payment. You save money or cash on your mortgage payment, but your principal stays the same thru out the period. Depending on what you do with the savings, you can rake in capital gains. As you treat a property as an investment, you can deduct the mortgage payment into your income. This strategy works well when the homeowner does not intend to stay in property too long, and the real estate property appreciates in the housing market. In year 2000, a one bedroom costs $140,000 at Vancouver Downtown in Canada. In year 2006, the same one bedroom values to $290,000. We compiled housing market that is forecasted to appreciate.
Vancouver, BC, Canada
With the strong economy, the demand for real estate property increases rapidly. There seems no sign of the bubble bursting. The real estate boom started five years ago. Usually, the real estate bubble burst every five year. Because the economy continues to improve and 2010 Winter Olympics proceeds as plan, the economist forecast the real estate market to improve as well.
Las Vegas, Nevada, USA
The median price of real estate property in Las Vegas surges higher although economist predicts the gloom and doom. Fortunately, this market remains strong and stable. The property gets sold ten to twenty percent above comparable value. And, the property appreciates by thirty eight percent.
Florida, USA
Florida housing market stands out as Florida dominates the top housing market of United States. It comes as a surprise for hurricane infested market. Many investor purchase the property as a summer beach house during winter times. The property appreciates from twenty five to thirty seven percent in value.
California, USA
The median price increases from twenty five to thirty percent. The home sells fast. And, the homebuilders try so hard to keep up with the demand.
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