The Pros and Cons of an Interest Only Mortgage
Interest-only mortgage loans have been a popular choice among home buyers for many years. However, they have also been subject to a lot of scrutiny, with some experts suggesting that they are too risky and should be avoided. In this blog post, we will explore the pros and cons of interest-only mortgage loans to help you make an informed decision.
Pros:
Lower monthly payments: One of the biggest advantages of an interest-only mortgage loan is that it allows you to make lower monthly payments compared to other mortgage options. This can be a significant benefit if you are on a tight budget or have other financial priorities.
Initial flexibility: Interest-only mortgage loans typically come with an initial period (usually 5-10 years) during which you only have to pay the interest on the loan. This can provide some added financial flexibility during the early years of homeownership.
Potential for investment: If you are confident in your ability to manage your finances and invest wisely, an interest-only mortgage loan can provide you with some additional cash flow that you can put into other investments. This can potentially lead to greater long-term financial returns.
Cons:
Risk of negative equity: With an interest-only mortgage loan, you are only paying off the interest and not the principal amount of the loan. This means that if property prices fall, you could end up owing more than your property is worth - known as negative equity. This can be a significant risk, especially if you have a large loan.
Higher long-term costs: If you choose an interest-only mortgage loan, you will end up paying more interest over the life of the loan as compared to other mortgage options. This means that the total cost of the loan will be higher in the long term.
Potential for repayment issues: With an interest-only mortgage loan, you need to have a plan in place to repay the principal amount of the loan at the end of the term. If you don't have a solid plan, you could end up facing financial difficulties when the time comes to repay the loan.
In summary, an interest-only mortgage loan can be a good option if you are on a tight budget or have other financial priorities. However, you need to carefully consider the risks involved, particularly the risk of negative equity, before making a decision. At the end of the day, it is advisable to seek professional financial advice and carefully evaluate your options before choosing any type of mortgage loan.