Interest Only and Equity

Mortgage lingo and terms are perplexing for anyone. From veteran loan consumers to first time buyers, it is always a good idea to do some research and get educated to the basics.

One of the more confusing issues in the mortgage scene is the question of building home equity while using a interest only mortgage loan repayment options.

With the interest only repayment, you are not required to make payments towards your principal balance. This means that you are only liable, each month, to repay your accrued interest. Without the burden of a large monthly payment, you can get the flexibility that you were looking for in the first place when you started looking at an equity loan. The only way you can build equity in your home with an interest only loan is if home values go up.

For example if buy a home and values go up 20% in 5 years, you will have built up quite a bit of equity in your home.  Conversely if home values go down, you could end up with negative equity because you have only been paying the interest on your home loan.

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Again, paying only the interest on the mortgage loan each month leaves your principle loan amount untouched.  A common type of this arrangement is that you just pay the interest for the first 10 years of a 30-year fixed mortgage. Then from years 11 to 30 you have to get the interest and the principal paid off.

There are situations where you could benefit from an interest only loan. You can free up a considerable amount of cash and buy more house but there is a catch. You build zero equity for years and then are saddled with huge payments after a set amount of years.

One common draw is that home mortgage interest deductions are the largest of the personal tax deductions claimed each year and can result in a sizable tax cut for most taxpayers. That’s because the majority of your mortgage payment is applied to pay for mortgage interest with just a fraction of the payment applied to pay down the principal.

To get a firm grip on the actual benefits and disadvantages of using an interest only payment method and the effects that it has on building equity in your home, request a free quote and a qualified mortgage consultant will contact you shortly

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