What Is an Interest-Only Mortgage

What is a Mortgage?

A mortgage is a type of loan that allows borrowers to purchase a house or property. These loans usually come from financial institutions, such as banks, or mortgage lenders. Home buyers can obtain mortgages to cover the total cost of their home. Usually, however, lenders may only provide a specific loan amount compared to the home value based on the Loan-to-Value ratio.

Mortgages are prevalent in the home loan industry. In most countries, home buyers must obtain a mortgage to pay their home value. There are several types of mortgages that they can get. These include fixed-rate and adjustable-rate mortgages. Although not as common, borrowers can also obtain interest-only mortgages to fund their property or home purchase.

What is an Interest-Only Mortgage?

Interest-only mortgages come with interest payments only. Borrowers do not have to bear the cost of principal amount repayments initially. Most modern-day mortgages come with the option of interest-only payments. Usually, interest-only mortgages don't cater to the needs of every type of borrower. Therefore, they are a niche mortgage type.

Interest-only mortgages are loans provided to home buyers by real estate. Although these come with the option for borrowers to make interest payments only, they can also make more payments. However, most borrowers prefer not to make additional payments. Through interest-only payments, borrowers can reduce their monthly mortgage bills significantly.

What are the types of Interest-Only Mortgages?

Interest-only mortgages come in two types. These are long-term loans. Usually, these loans come with a limited period for which borrowers can make interest payments only. Some loans may set this limited period at five years while others may offer up to ten years. Once this period is over, borrowers have to start making mortgage payments as regular through amortized payments.

The first type of interest-only mortgages is 30-year mortgages. These come with an option to allow investors up to five years of interest-only payments. The second type is a 40-year mortgage. This type of mortgage comes with up to ten years limit for interest-only payments. There are also other types of interest-only mortgages, but the above two are the most prevalent.

What is the difference between Interest Only and Repayment Mortgages?

There are two types of repayment schedules for mortgages. These include repayment and interest-only mortgages. With repayment mortgages, borrowers need to pay a small portion of the loan with the interest payments. As mentioned, these occur on an amortized repayment schedule, usually provided by the lender. At the end of the mortgage, the borrower will have paid off the whole mortgage using repayments.

The other option is interest-only mortgages. With these mortgages, borrowers only repay the interest on the loan. Once the interest-only period is over, investors still have to pay the full mortgage principal amount. This way, they will still owe the original amount borrowed.

Conclusion

A mortgage is a type of loan that borrowers can obtain on their homes. There are various types of mortgages. Based on the repayment schedule, borrowers can also get interest-only mortgages. These allow borrowers to make interest payments on the mortgage only for a specific time. Once the period is over, they need to start repaying the original mortgage amount.

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