In Interest Only Mortgage, you pay only the interest on each payment. You save money or cash on your mortgage payment, but your principal stays the same thru out the period. Depending on what you do with the savings, you can rake in capital gains. As you treat a property as an investment, you can deduct the mortgage payment into your income. This strategy works well when the homeowner does not intend to stay in property too long, and the real estate property appreciates in the housing market. In year 2000, a one bedroom costs $140,000 at Vancouver Downtown in Canada. In year 2006, the same one bedroom values to $290,000. We compiled housing market that is forecasted to appreciate.
Vancouver, BC, Canada
With the strong economy, the demand for real estate property increases rapidly. There seems no sign of the bubble bursting. The real estate boom started five years ago. Usually, the real estate bubble burst every five year. Because the economy continues to improve and 2010 Winter Olympics proceeds as plan, the economist forecast the real estate market to improve as well.
Las Vegas, Nevada, USA
The median price of real estate property in Las Vegas surges higher although economist predicts the gloom and doom. Fortunately, this market remains strong and stable. The property gets sold ten to twenty percent above comparable value. And, the property appreciates by thirty eight percent.
Florida housing market stands out as Florida dominates the top housing market of United States. It comes as a surprise for hurricane infested market. Many investor purchase the property as a summer beach house during winter times. The property appreciates from twenty five to thirty seven percent in value.
The median price increases from twenty five to thirty percent. The home sells fast. And, the homebuilders try so hard to keep up with the demand.
Just like an ice cream. Interest Only Mortgages come in different flavors. However, it does not mean that one type is better than the other. When you purchase a home, mortgage lenders consider the home as an investment. Each type of Interest Only Mortgages depends on the repayment of the investment. Mortgage Lenders offer Pension Mortgages, Endowment Mortgages, and ISA mortgages which are the three types of Interest Only Mortgages.
Pension Interest Only Mortgages
This mortgage is a tax efficient way to purchase a real estate property. It works just like Endowment Interest Only Mortgages, but the contribution goes to the pension plan. Each mortgage payment goes to pay interest, pension, and insurance. As you make mortgage payment, the pension plan grows tax free until you retire. Then, you use the accumulated pension to pay off the principal.
Endowment Interest Only Mortgages
This mortgage was popular in UK during the eighties and nineties when the interest is high. Each mortgage payment goes to pay the interest, and insurance. In turn, the insurance company invests on stocks and shares. The insurance policy ends at the same time of the mortgage loan. And, the proceeds pay off the principal.
ISA Interest Only mortgages
ISA stands for Individual Savings Account. This mortgage is another tax efficient way to purchase a home. There is no tax on personal taxes and withdrawals. Each interest only mortgage payment goes to pay interest, and ISA. In ISA, you can choose where to invest your money, bonds, stocks, or life assurance. And, the payments are flexible. In times of tough financial crisis, you can limit or delay payments to the ISA.
If you play your cards right, you can make a killing with Interest Only Mortgage. Know the facts before you invest on this type of mortgage. Actually, Interest Only Mortgage is a little bit of a misnomer. This mortgage is not another type of mortgage. It is more an option on your mortgage. That means any borrower can get this option on their mortgage.
Forecasting the Interest Rates
It is hard to predict how the interest rate decreases or increases in the future. Interest Rates depend on many factors. Look for trends. If you think the interest rate will decrease, you may want to hold off Interest Only Mortgage to purchase a home.
Value of Property
Interest Only Mortgage can be profitable when you sold the property at a higher price. Property Development, Special Events, and Excellent Location increases value of property over time. Watch out for property development on the area such as shopping mall, more buildings, and theme parks. Look for special events such as winter Olympics, summer Olympics, or so. Also, the downtown area is bound to increase in value. It is not advisable to invest on property when the value is going down. In case, the value of property goes down. Be patient. Wait for the value to go up.
Bear in mind that the principal stays the same in Interest Only Mortgage. Your income depends on how much you sell the property, and what you did with the savings. Instead, you can invest the savings on improvement of your property and mutual funds of your choice.
Nothing last forever
Your mortgage lender will ask you to repay the principal over time. Be aware how long you can stay on interest only mortgage. So, you can make arrangements when you sell the property.
Mortgage Lenders offers a special scheme in which borrower only pay the interest. With interest only mortgage, there is no amount that goes to pay off the principal. The borrower pays lower mortgage payment. This scheme is perfect for real estate investor and homeowners who do not wish to stay for long on the house. You can claim the interest on your income tax, since the interest is an expense for investment.
Combating high home prices
The interest only mortgage was created to combat high price of home. On a $250,000 principal, 5% interest rate, and 30 year amortization, the typical mortgage monthly payment comes to $1,461.48. With interest only mortgage, you only pay $1,041.67. You save $419.81.
Investing to your future
Sum up your monthly savings on interest only mortgage in a year. In one year, you save $5,037.72 ($419.81 interest only payment * 12 months). If you choose to invest on your property such as hardwood floor, it greatly increases the value of the property. If you choose to invest on mutual funds, bonds, stocks, and income trust, you money compounds to great profitability.
Monetizing your property
Real estate property appreciates or increases in time. Real estate cycle is five years. Every five years, the real estate property appreciates or depreciates. If you buy the property on the right time, you can deeply benefit from Interest Only Mortgage. Let us take for example the Vancouver real estate market in Canada. In 2010, A Winter Olympics will be held in Vancouver, Canada. Real estate property appreciates in value. A one bedroom condo is worth $120,000 in 2000. After six years, the one bedroom condo is worth $240,000. That is a $120,000 profit. Multiply your profit by 10 real estate property. That makes you a millionaire.
Regular mortgage monthly payment already covers payment on interest. Any extra or additional payment refers to prepayment. Mortgagor or borrower often asks why I have to pay penalty on prepayment or refinance. Since the mortgage companies loses payment on interest, the mortgagor or borrower needs to pay penalty. The penalty on mortgage depends on the mortgage companies.
Mortgage companies give no penalty on every prepayment for fully open mortgages, while mortgage companies give penalty on every prepayment for fully closed mortgages. As for the partially open mortgages, mortgage companies give no penalty on prepayment with limitations. The mortgagors pay penalty when they exceed limitations.
As a mortgagor, you got three common prepayment privileges. First, annual lump payment allows prepay up to 15% of the original amount of mortgage loans. Second, annual increase on the regular payment allows increase of regular payment up to 15% for the remainder of the term. Finally, double up allows to double regular payment up to the remainder of the term.
Since the mortgagor pays more on top of the regular mortgage payment, the amount of time to repay reduces significantly. For example, the mortgagor saves 2 years and months on $150,000.00 principal, 6.5% interest, 25 year mortgage, and $500.00 additional payment (one time after a year).
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