The housing market is still on the downslide but that could change at any time. It could get worse or better, but it definitely will change. Economist debate over the recent drop in housing prices, the economic recession and of course, the recovery. This leaves investors, new homebuyers and anyone in the UK, a bit uneasy about the future. One way new home purchasers are gaining some insurance into their future is by using an interest only mortgage.
An interest only mortgage is nothing more than a fixed mortgage without the small payment toward principal. Because the mortgagor is uncertain about their future, they look for ways to keep house payments smaller as well as other budget items. An interest only mortgage is one way to do this.
When a buyer uses an interest only mortgage, the payment is lower, however, no money pays toward the principal and at the end of the mortgage term, the mortgagor has to pay off the entire balance of the home. Most of these mortgages, however, give the mortgagor the right to pay on the principal if they desire. This is perfect for the couple that is uncertain about their financial future. While they might believe that there’s a higher income ahead, they still want to keep expenses lower just in case it doesn’t occur or to give them the opportunity to build an emergency fund as a safety net.
When they open an interest only mortgage, they also open a savings account or use another method of savings. Instead of paying an extra $200 toward their mortgage as they might do with a traditional mortgage, they apply the money to the savings. When there’s enough to cover a year of expenses, they then begin to chip away at the mortgage balance. As the principal decreases, so do their interest payments and they increase the amount they pay toward the principal on their interest only mortgage.
With this plan in mind, the homebuyer is ready to tackle any financial conditions. If there’s improvement and housing prices rise as does the rest of the economy, the homebuyer purchased at the right price and for the right interest rate. Their plans to increase income will probably occur and the decision to use an interest only mortgage was wise, because they still can pay off the principal.
If, as some economists predict, the housing market and economy gets worse, the homebuyer has a minimum payment that allows him to put money away in the event his financial conditions get worse. While he might have to pay interest only and not put any money in savings if it does, he’ll have an affordable house payment in the meantime.
No matter what the immediate future holds, the long-term future will most likely show an increase in inflation and therefore an increase in housing prices. Those who used an interest only mortgage to purchase a home at a discount rate will find that their income will increase along with the value of their home. This will allow them to use pay off their house with inflated dollars, and be still another way they got their home at a bargain price.
Of course, there’s no perfect scheme when it comes to the financial future of an individual. Only individuals with strict discipline will put funds away for emergencies and pay on the principal of the interest only mortgage. Others will have good intentions and no follow through leaving them with a huge burden at the end of the interest only mortgage term.
Financial conditions change and financially comfortable individuals can find themselves living on the edge. Those living on the edge can find themselves suddenly flush with money. The only thing that is certain is that the individual that uses the interest only mortgage, plans for the future and follows through with those plans will be far better off than someone using the same interest only mortgage without any regard to the potential problems in the future.
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