If you decide to apply for a mortgage loan for your home, you will have to choose between a standard loan and an interest only loan. The latter concept merits a detailed explanation. An interest only loan is one where you make monthly payments on the interest only. In time, you have to pay the principal amount as well. It is a very good idea to compare the two types of loans before you choose the one that is best for you. Let’s say you take out a quarter of a million loan to buy a home. You will be offered a standard loan as well as an interest only loan, but the interest rate on the latter is going to be half a percentage point lower. Both loans have a term of 30 years. If you choose the interest only loan, the total cost is going to be around $150,000.00 less than the total standard loan cost.
How does one calculate interest only payments? You have to take into consideration the loan amount, the interest rate in percentage points, and the loan term, as well as the total number of payments you are facing over this term. Undoubtedly, interest only loans are not for everyone. Which clients are the most appropriate ones for this loan type? These loans work great for those, who have a guaranteed cash flow and stable source of income in the future. The reason for this is because the client has more control over matters at the point when he begins to cover the principal. Later payments are higher as a result. You should cover the additional
It is relatively easy to calculate interest only mortgages. You can use some of the mortgage calculators available online to this purpose. If you are doing the calculations yourself, the first thing you have to do is to multiply the interest rate by the remaining mortgage amount. Then you divide this sum by the amount of payments you make a year. The monthly payment schedule is represented by the number 12. This will show you the minimum, which you have to cover per month. The principal payment is not included in this sum. Assure yourself that you have subtracted all the payments you have made from the total mortgage amount. You have to subtract the principal paid so far and not the amount of interest. Naturally, you have to make sure you have the right interest rate. If the mortgage comes with a fixed interest rate, the rate will be the same over the term of the mortgage. With adjustable rate mortgages, the interest rate will fluctuate depending on the negotiated margin rate and the prime interest rate.
Another thing to do is to invest the payment savings on your mortgage in a retirement account. Early deposits are rewarded with a compound interest rate. Finally, make sure you will be able to afford an interest-only mortgage later. You should be prepared for a drop in your property’s appraisal value.