What is an Interest Only Mortgage?

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Author: John Mussi

Article source: http://www.goarticles.com/. Used with author's permission.

An Interest Only Mortgage is one where the repayments are made up entirely of the interest on the loan. When the mortgage term is complete, the capital originally borrowed is still outstanding.

To cover the balance, borrowers are advised to make regular contributions into an investment policy alongside their mortgage repayments. This can be arranged by the mortgage provider, most commonly in the form of an endowment mortgage, an ISA mortgage or a pension mortgage.

With this type of mortgage, the mortgage lender is advancing you money and asking you to do no more than pay the interest each month. In other words you are merely servicing the debt, and the amount outstanding on your mortgage will remain constant.

An interest only mortgage can be an excellent choice for some borrowers, who have a valid use for a lower initial required payment. The actual capital which is freed up to pay for your property can be invested into a long term investment fund, which, if invested carefully, ought to help pay off both your mortgage earlier than expected, and may even be used to cover the cost of your interest only mortgage payments.

With interest only mortgages, most borrowers take out some kind of savings plan to ensure that at some time in the future they will have enough money to pay off their mortgage and have the satisfaction of knowing that the bricks and mortar belong to them.

With an interest only mortgage, a borrower will invariably take out an endowment policy, a pension, or an ISA. In addition, it is always good practice to arrange adequate life cover to ensure that should the mortgage payer die the loan will be repaid in full.

With a repayment mortgage, you make monthly payments on the borrowed capital as well as the interest. With interest-only, however, your payments are made up of the interest alone, and you do not repay any of the capital until the mortgage term is complete. Because you are only paying back the interest on the loan, you will pay less each month than you would with a repayment mortgage.

If you do choose an interest only mortgage, you need to make sure that you know from the outset how you intend eventually to pay off your mortgage loan.

Each month you will repay interest on the amount borrowed, but at the end of your term you need to be able to pay off the remaining capital. This may be achieved by taking out an Endowment, Pension or ISA, which should provide you with the amount you need at the end of your mortgage term.

You must be aware that the value of investments plans can go down as well as up and are not guaranteed upon maturity. This makes an interest-only mortgage a more risky option than a repayment mortgage.

Your home may be repossessed if you do not keep up repayments on your mortgage.

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