Interested In Interest Only?

In case you didn’t know, Interest only mortgages do exist. These are mortgages that you do not have to pay towards the principal but only the interest. These types of mortgages can come in the form of 1st, 2nd, 3rd, and equity lines of credit.

An interest only first mortgage isn’t very common among everyday consumers. Mainly because home owners prefer to pay down the principal to build equity and one day pay off their mortgage. With house pricing consistently on the rise, interest only mortgages seem to be growing in popularity or at least in curiosity. To qualify for an interest only first mortgage you must have a 20% down payment on the property.

The median home price in London, Ontario is roughly $350,000. If you were to get a mortgage for $280,000 at a rate of 5%, monthly principal and interest payments would be $1628.49. An interest only mortgage at the same rate would be $1166.67.

The amount saved by not paying the principal is quite significant and can be put towards savings, RRSP’s, renovations, investment opportunities, etc. You also have the option to pay down the principal any time in lump sum amounts. Keep in mind while you may not be paying down the principal, as time goes on, property value tends to rise.

These types of mortgages specifically peak the interest of real estate investors and various businesses. This way the owners can manage and run their operations with low overhead costs. Leaving room to purchase/improve business items and equipment.

Interest only as 2nd, 3rd, or equity lines of credit are generally taken out as short-term solutions for debt consolidation, renovations, or other financial needs. There’s more of a risk with 2nd and 3rd’s as the interest rates can be significantly higher. With home equity lines of credit, you only pay interest on the amount used.

This article isn’t meant to sway people towards interest only mortgages but to show them there are more options than a conventional mortgage. In certain scenarios an interest-only mortgage can be a viable option.

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