Arnold
CibbuanoDisadvantages of Interest Only Mortgages
July 18th 2006 00:30
Yesterday I looked at the two stellar advantages of the interest only loan and briefly got into the risks associated with this type of loan. Today, I’ll discuss the disadvantages of an interest only loan a little more.
As I touched upon yesterday, one of the worst aspects of an interest only loan is that if it is poorly managed it can be a very big risk and leave you in a lot of financial strife at a time of your life when you are supposed to be kicking back and enjoying retirement. Trust me, if you screw up the money management side of an interest only loan, don’t be expecting to be retiring with all your pals. The thing that you have to remember is that at the end of the loan period, you are going to have one hefty bill and you’ve got to have a strategy for paying that off. Before you sign up for an interest only loan, think about how comfortable you are going to be with a bank knocking on your door and asking for the full amount that you are borrowing today to be repaid. Before you get into this type of mortgage the first thing you want to have very clear is how you are going to fund that one off big bill. If you are borrowing $300,000, you have to have a strategy for how you are going to come up with $300,000 of spare cash within a 20 to 30 year time period.
Some people may decide to use the property itself to repay the interest only loan. Markets have a general tendency of increasing and you’d hope that in 20 years time despite some drops and spikes, the value of your property should have increased. Therefore, some may choose to cash in their chips, sell the property and use that cash to repay the principle. Personally, I think this is a risky option. When it comes to investing and financial management, the more you can reduce your dependability on events the better. For starts, who knows what a property market is going to yield in 20 years. Overall, the market may have improved, but you still may be forced into a hurried sale at a bad time and not get the return you’d like or need. There may not be the demand for your property at the right time. I think the safest option is to at the very least aim to be in a position whereby you will have enough capital to pay off the property without having to resort to selling it to pay the mortgage principal. If you are following a strategic financial plan, this shouldn’t be a problem achieving. After all, the primary aim of taking up an interest only loan is to be generating a reasonably high rate of return from your spare cash. If you are in a situation where you are forced to sell your property to pay off the principal on an interest only loan, you haven’t been making your spare funds work effectively for you.
Compare the two scenarios, at the end of a traditional style of loan you’d have a property which has been totally funded by your hard work, you have something to show for your investment efforts at the end of the loan. If you’ve taken up an interest only loan and have to sell your property to pay back the principal at the end of the loan term, you’ve paid a hell of a lot of interest and don’t have anything tangible to show for your efforts except for any appreciation that has been realized in the property.
As I touched upon yesterday, one of the worst aspects of an interest only loan is that if it is poorly managed it can be a very big risk and leave you in a lot of financial strife at a time of your life when you are supposed to be kicking back and enjoying retirement. Trust me, if you screw up the money management side of an interest only loan, don’t be expecting to be retiring with all your pals. The thing that you have to remember is that at the end of the loan period, you are going to have one hefty bill and you’ve got to have a strategy for paying that off. Before you sign up for an interest only loan, think about how comfortable you are going to be with a bank knocking on your door and asking for the full amount that you are borrowing today to be repaid. Before you get into this type of mortgage the first thing you want to have very clear is how you are going to fund that one off big bill. If you are borrowing $300,000, you have to have a strategy for how you are going to come up with $300,000 of spare cash within a 20 to 30 year time period.
Some people may decide to use the property itself to repay the interest only loan. Markets have a general tendency of increasing and you’d hope that in 20 years time despite some drops and spikes, the value of your property should have increased. Therefore, some may choose to cash in their chips, sell the property and use that cash to repay the principle. Personally, I think this is a risky option. When it comes to investing and financial management, the more you can reduce your dependability on events the better. For starts, who knows what a property market is going to yield in 20 years. Overall, the market may have improved, but you still may be forced into a hurried sale at a bad time and not get the return you’d like or need. There may not be the demand for your property at the right time. I think the safest option is to at the very least aim to be in a position whereby you will have enough capital to pay off the property without having to resort to selling it to pay the mortgage principal. If you are following a strategic financial plan, this shouldn’t be a problem achieving. After all, the primary aim of taking up an interest only loan is to be generating a reasonably high rate of return from your spare cash. If you are in a situation where you are forced to sell your property to pay off the principal on an interest only loan, you haven’t been making your spare funds work effectively for you.
Compare the two scenarios, at the end of a traditional style of loan you’d have a property which has been totally funded by your hard work, you have something to show for your investment efforts at the end of the loan. If you’ve taken up an interest only loan and have to sell your property to pay back the principal at the end of the loan term, you’ve paid a hell of a lot of interest and don’t have anything tangible to show for your efforts except for any appreciation that has been realized in the property.
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