Buying a home can be difficult, especially since home acquisition requires buyers to undergo a grueling process which can be tricky, especially if a buyer has little to no idea about buying a home. Making a house purchase might be the least of your priorities at the moment, but sometimes, opportunities occur which are too good to pass up.
Sometimes, a house you desire will come on the market, but you may find yourself short on cash to pay for your purchase. Searching for a loan may be the best opportunity at the moment. As always, it’s important to do your homework. There are many types of loans you could apply for, but mortgage loans are the most common loans for many borrowers.
But like any loan, you should not enter into one without proper research. Borrowing from a mortgage loan company allows the promise of purchasing your dream home, all the while the mortgage loan company keeps the title as a guarantee you will pay for your principal loan, along with its associated interest rates.
If you fail to do so, you may face foreclosure, along with the negative financial implications, and that is the last thing that you want to happen. Mortgage loans may be popular, but it can also bring with it some disadvantages for people who have a limited budget for their amortization rates.
If you are considering to get a loan for your home purchase, then you should explore options aside from basic mortgage loans (such as an interest-only mortgage), especially if you have a limited income or budget.
As mentioned earlier, applying for a mortgage loan may be your best bet to acquire that house you have been dreaming of. Mortgages can give buyers the opportunity of owning a house by offering to pay the purchase price in exchange for getting a guarantee from a borrower that he or she will pay for the loan by a determined period.
In turn, the loaned principal or loan amount is then divided by a certain number of payments with its corresponding annual or monthly interest rate which is also determined by the creditor. These monthly payments or amortization involves paying for the principal loan, along with its corresponding interest rate and this can sometimes be taxing for people who earn a modest income.
The interest-only mortgage can be one of the options which you can choose as you get a loan. Interest-only mortgages work where you only pay for the interest of your loan, and once you finish paying for the interest over a specified period, you will begin paying for the principal loan.
The main difference with the conventional mortgage loan is its payment plan, where a borrower pays for the overall interest first, before paying for the principal loan and similarly, conventional loans require borrowers to pay for their principal loan, along with its corresponding interest, over a determined period.
With this in mind, a borrower can choose whether he or she will decide on a fixed-rate term or with an adjustable-rate term, which applies to both types of loans. For interest-only mortgages, the amortization for the total loaned amount may increase significantly once the term for interest payment has commenced, and since the payment of the interest may take a few years, the borrower can then have the option of having a mortgage refinance loan to pay for the principal.
Getting a mortgage refinance loan can help a borrower pay the principal at a more affordable rate, given that interest rates may have become significantly lower at this time, compared to the time when the mortgage was made. Despite the lower interest rate for mortgage refinancing, a borrower may face the possibility of paying for double interest rates for the principal loan.
Given a borrower may have already paid for the entire interest during this time, the same principal amount can be subjected to another interest rate once a mortgage refinance is placed into the picture. This may seem disadvantageous, but depending on what your initial goals are, and depending on the value of your property, it can still be worth it, given the real estate property investment.
As mentioned earlier, an interest-only mortgage and a conventional mortgage loan have their fair share of similarities, and their differences lie mainly on the payment plan. While interest and principal payments are calculated accordingly, interest-only mortgages separate the total interest payment from the principal loan payment.
This gives the borrower some time to rally some funds to pay for the main loan after he or she has completely paid for the interest. An interest-only mortgage can have some benefits to any borrower, especially if he or she knows how to play their cards right. Some advantages from interest-only mortgages include:
1. It can help you afford the property. Some properties may be too good to pass up, and because of that, the probability of getting it sold is high. If you lack the funds to purchase a property which you consider to be a worthy investment, and you don’t want anyone else to acquire it before you do, then you should apply for a mortgage.
Mortgage payments may seem taxing on your finances, so you can consider getting an interest-only mortgage, where you will only be paying for the interest for a fixed period before you begin paying for the principal amount. Once the principal payment begins, a borrower may opt for a mortgage refinance loan to help him or her pay for the principal loan, especially since the payment shifts in price which can lead to payment shock.
2. Interest rates may be lower. Like other loans, applying for an interest-only mortgage is also a gamble meaning, you wouldn’t know if interest rates will go up or will go down after a predetermined period. For interest-only mortgages, the interest rates are calculated based on the current rates or the rates which are in effect at the time of loan application.
In the future, interest rates may be lower than the rate what a borrower has already paid for, so it also pays if he or she know how to take advantage of economic predictions so that he or she can choose wisely.
3. Monthly payments are lower for the first few years. Some borrowers may not be able to afford mortgage amortization, which involves both interest and principal payments at the time when they applied for the loan, so an interest-only mortgage is an option which many can take advantage of for a few years until they can come up with a solution to pay for the principal loan.
4. Term options are also flexible for interest-only mortgages. A borrower may choose either a fixed-rate term or an adjustable-rate term, depending on how he or she assesses his or her capability to pay for the loan.
While an interest-only mortgage offers the aforementioned benefits, it also has associated risks and disadvantages. These disadvantages should not be ignored, especially since ignoring these could lead you into a bad financial situation if left unnoticed. Some disadvantages of interest-only loans include:
1. Payment shock may be felt by a borrower. A payment shock may occur after the borrower finishes paying for the interest and start paying for the principal loan where his or her payments shift from small payments to larger ones, abruptly. This time of financial baloon could set you up for an uncertain financial future, particularly if you failed to prepare for this change.
2. The principal loan is still intact after paying for the interest after a certain period. If you can’t find a way to pay for the principal loan, then you may face foreclosure.
3. If you do find a way to pay for the principal loan through a refinance mortgage, you may have to spend some money for the charges involved in services and other fees.
Despite these disadvantages, it is important to note that how you strategize and how you allocate your funds can ultimately lead you to maximize the benefits you can receive from making an interest-only mortgage, while minimizing the effects of its disadvantages.
Ultimately, interest-only mortgages can be advantageous for homebuyers, especially if they see that a real estate property is a worthy investment. An interest-only mortgage works similarly with a conventional mortgage, only that interest is paid first for a certain period, before the principal amount, in contrast to the conventional mortgage where the principal and interest are paid altogether.
Making an interest-only mortgage can have benefits to a borrower, but it can also be disadvantageous if a borrower does not strategize well. If you are considering to get an interest-only mortgage, avoid foreclosing your property by paying for your dues on time, and strategize properly to maximize the benefits you can enjoy, and minimize the setbacks from making an interest-only mortgage.
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