If you're about to get a home mortgage, you may have already stumbled upon the term "interest only mortgage". If you are wondering what this mortgage type is and how it works, here is a quick explanation:
The typical type of mortgage requires you to pay back the principal debt, or the amount that you borrowed, plus the interest of that amount. But with an interest only mortgage, you will be able to save on payments as you are only required to make payments on the interest, and not the principal. This means that your monthly payments are lower than the payments made by people with the regular mortgage type.
However, as you reach the end of your term, you will not yet be freed from your FULL principal debt. This means that you are still far from owning that home. Whereas if you choose the typical repayment mortgage, you will be the owner of that home by the end of your mortgage term. Meaning, by the end of your term, you will still owe your lender $280,000 or whatever the home's value is. Plus, if you are not able to pay for the lump sum at that point, you may be charged by your lender an additional interest for the entire loan amount.
Basing on that short description, it is very apparent that an interest only mortgage should not be a primary option. However, if you are financially challenged and are desperate to get a home, this may be the best option. Most people who opt for this mortgage type are the ones who really want to buy themselves their first home, then when a larger income comes their way, they just switch from an interest only mortgage to a repayment mortgage.
Furthermore, the interest only mortgage are also used by buy-to-let buyers, or the ones who intend to have the property rented. If this is your purpose, then this mortgage type is a good option for you.
