Is an Interest-Only Mortgage a Good Idea?

Interest –only mortgages used to very popular, but these days they are very difficult to find. This is because there was a time when people took them out but made no provision to pay them off and therefore led the bank to repossess the house once the mortgage term was over as there was no money to pay it off with. There was also a problem with investments not growing as quickly as expected and therefore people who invested each month hoping to have enough money to pay off their mortgage once the term of the loan was up, actually did not have enough. This is why lenders are not so keen to offer this type of mortgage any more. However, it is possible to get some in some places, so it is worth thinking about whether it is the right option for you.

With an interest only mortgage you only pay the interest payments t the lender each month. You do agree, as part of your terms and conditions with them, that you will make other provision to make enough money during the term of the mortgage so that you will pay it off when it is due to be repaid. Most people invest money. An investment can be risky, but there are lots of different types with different risk levels. It is important to understand about the different types and the different levels of risk before you start to invest. Many people would pay a financial advisor to help them, as they could explain all about risk, types of investment and then show them the investments which best suit their needs.

An investment needs to be set up for the long term to offset all of the small fluctuations that happen in the markets. Therefore it can be a great thing to do to pay off a mortgage as the term of the loan tends to be between two and three decades. Paying in something each month means that you will accumulate a portfolio and by the time that you need the money, you should have as much as you need. It is wise though to keep a watch on it and make sure that you are sure that it will make enough money by the time you need to pay off the loan.
Compared with making repayments each month there are advantages and disadvantages. As you are not whittling away the debt, you will still owe the same amount of money at the end of the term as at the beginning. Some people like seeing the amount they owe going down over the term, but if this is not something that concerns you, then you will not need to consider this.

The investment that you are making could end up being worth more than the value of your loan. This means that when you have paid it off, you may also have some money left over which you could use for anything you wish. However, there is a risk that there will not be enough money to pay off the whole loan and then you will have to pay more in or find an alternative investment so that you know you will have enough.

Although you are contractually obliged to make an investment to pay off the mortgage, the lender will not need to see proof that you are doing it. This means that if you miss some payments in, due to financial difficulties or you just decide not to invest at all, they will not know. This might sound fine, but when it comes to paying off the mortgage and there is no money there, the home will have to be sold. You could sell it before the term is up and use the proceeds to pay off the mortgage. This sounds like a great plan, but it will leave you without anywhere to live and you may not make that much back as it all depends on your property increasing in value. This is a big risk and should not be done, but if you think that there is a risk that it may happen ith you, then it could be best to avoid this type of mortgage.

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