Interest-Only Mortgages
and Loans
At the end of the term the borrower may
renew the interest-only mortgage, repay the capital, or (with
some lenders) convert the loan to a principal and interest payment loan
at his option. It should be noted that some interest-only mortgages
in Canada allow the borrower to pay interest-only, principal and
interest, or even principal and interest plus 20% extra.
Getting
Government Grants
In the United States, a five or ten year interest-only mortgage
period is typical. After this time, the principal balance is amortized
for the remaining term. In other words, if a borrower had a thirty year
mortgage and the first ten years were interest only, at the end of the
first ten years, the principal balance would be amortized for the
remaining period of twenty years.
The practical result is that the early repayments (in the interest-only
period) are substantially lower than the later repayments. This enables
a borrower who expects to increase their salary substantially over the
course of the loan to borrow more than they would have otherwise been
able to afford. Interest-only mortgages were popular in the
1920s. Due to the economic downturn and lack of work for the average
person, there were many foreclosures during the Great Depression of the
1930s.
Interest-only loans
are popular ways of borrowing
money to buy an asset that is unlikely to depreciate much
and which can be sold at the end of the loan to repay the
capital.
The advantages of
Interest-Only Mortgages vs.
a standard Fixed Rate Mortgage would be simplistically the
lower monthly payment and a greater cash flow.
For example, if a
30-year fixed-rate loan of $100,000 has an interest rate of
6 percent, the standard "fully amortizing" monthly payment
is $599.56. This payment, if continued with the same
interest rate, will pay off the loan at maturity. The
interest-only mortgage payment, however, is only $500.
The interest-only borrower saves $99.56; the borrower
with the amortized loan puts that same amount toward
repaying principal. |
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