Interest Only Mortgages

An interest only mortgage results in a lower house payment because nothing is paid on the principal. The good news is that the house payment is lower, but the bad news is the principal balance never goes down. So, if you sell the house 10 years from now you will not receive any equity, and the payoff amount will be what you paid for the house. If the house appreciates in value, you will have a profit on the house. If the house goes down in value, you will not have had any increase in equity to cover a decline in value.

 

For the person that can plan to live in a home for 10 years, the reduction in house payment could be significant, and it is always possible that the home would appreciate enough to pay the costs of sale and leave you with some chnage.

 

An examplke of an interest only mortgage is a $165,000 house that is mortgaged for $165,000 at 4% for 30 years. The interest only payment would be $653 a month. At 4%, the principal payment would be approximately $207 or $2544 at the end of the first year.

 

Over that same 10 year period, the principal payments would reduce the balance owing by about $25,000. However, as we have seen recently, the person that thought they had a positive equity in their home found that they owed money because housing prices declined.

 

Housing is no longer the sure bet that it once was, So, weigh the options, think about the neighborhood, and look at the overall stability of the area.

 

Study the performance of the house prices in the neighborhood over the past 5 years. Is the neighborhood maintained by the residents? The point is are you making a good investment where the principal will hold.

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