On the surface, interest-only mortgages sound like a bad idea when buying a home in Philadelphia. It’s a type of mortgage instrument that has the payments going towards the interest on the mortgage without touching the principal. You’re probably thinking that means you’ll pay only the interest on the home and won’t even own the front door for years. While this is true to an extent, that’s not all there is to an interest-only mortgage. The up-front interest payments only last a certain amount of time and are no riskier than a traditional mortgage. In fact, they offer more financial flexibility than a traditional mortgage and here’s why.
Interest-Only Mortgages, Understanding the Basics
The difference between an interest-only mortgage and a traditional mortgage is that the interest is paid up front instead of amortized over time. Take a look at an amortized mortgage table. You’ll see that the first few years of the repayments are almost all interest with very little principal. An interest-only mortgage is similar except for the fact it limits how many years the interest is paid up front. Most interest-only mortgages have an option to pay the interest for a maximum of five years on a 30-year mortgage. The payments for the remaining 25 years are principal and remaining interest on the loan.
Why an Interest-Only Mortgage Gives Financial Flexibility
Paying only the interest on a mortgage means that the monthly repayment is significantly lower for the term of the interest-only payments. A Philadelphia home that costs $200,000 and receives a conventional mortgage with 4 percent interest is going to have a monthly payment of $955 with principal and interest. Going to an interest-only mortgage means the payment is around $665 a month because there’s no payment towards the principal. That’s a savings of a little less than $300 a month. You always want to make sure to get real numbers from a Philadelphia mortgage company to make sure if this is the right decision for a mortgage for your situation.
Lower payments in the early years of ownership mean there’s more money for an emergency repair. Homeownership comes with the need to fix the roof, maintain and replace mechanicals, and dealing with random issues that crop up. If the home is older, the odds are greater that there will be a problem than not. An interest-only mortgage means there’s money to fix the deferred maintenance.
You are not restricted to making interest-only payments for the specified time period, either. There’s an option to pay extra towards the principal even if it’s only a small amount. Chipping away at the principal during the interest-only period can reduce the payment when it converts to the interest and principal period of the mortgage.
Some people take on the interest-only mortgage because they have irregular income throughout the year and want the option to pay extra on the principal when they have more money available to them. Others anticipate making more money in the future as their career grows and can handle the increase in the mortgage when the interest-only period expires.
Are There Drawbacks to an Interest-Only Mortgage?
Perhaps the biggest drawback is the fact the payment increases once the interest-only period expires. If you’ve put no money towards principal on that $200,000 mortgage, your payment goes back to $955 or higher depending on the mortgage terms. Getting precise mortgage numbers is best done with the help of a Philadelphia mortgage company. You want to be fully informed about the terms of an interest-only loan before deciding it’s the right mortgage instrument for your situation.
Interest-only mortgages are not the risky lending instruments they’re made out to be. They’re an option for people who want or need the lower payments in the early days of the loan and are able to handle the higher payments when the time comes. What they are not is a tool to get people into a home who wouldn’t otherwise be able to afford one.