Overpaying Interest-Only Mortgages
An interest-only mortgage is a type of loan that only requires you to pay the amount of interest that is accruing each month. Then you will eventually make a balloon payment to pay off the principal balance of the mortgage. Many people who have these mortgages opt to pay more than they are required as it provides them with some benefits.
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Payment Flexibility
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One of the reasons that many consumers opt for the interest-only mortgage is because it provides payment flexibility. If you have a job in which your income changes from month to month, such as commissioned sales, this can be very beneficial. On months where your income is lower than normal, you can stick with the interest-only payment. On other months, when you do better than normal, you can overpay your mortgage payment as if you were making a traditional mortgage payment with principal and interest.
Paying Off Principal
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One reason that many people pay more than they have to with an interest-only mortgage is so that they can accumulate equity in their home. When you only pay the amount of interest that is accruing on your account, you never buy down the balance of your loan. At that rate, you would get to the end of your loan without having any more equity in your home than you did at the beginning. Any amount that you pay on top of the interest will go toward paying off the principal.
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Changing the Payment
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When you pay more than you owe on your interest-only mortgage, it also can help you on a monthly basis. The amount of your interest payment is calculated on how much principal you have. If you pay down the principal, this has the effect of lowering your monthly mortgage payment. While the effect will not be large all at once, it can make a difference if you continually overpay your interest-only mortgage payment each month.
If You Do Not Overpay
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If you do not overpay your interest-only mortgage, you will get to the end of the loan term and still have the full balance of the loan. At that point, you have the option of refinancing your loan or paying it off in some other way. Since you most likely do not have that much cash sitting in an account, refinancing will most likely be your best option. Some people also elect to make an extra mortgage payment occasionally to buy down the balance instead of paying more each month.
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