An interest-only mortgage is helpful for borrowers going through a tight cash flow for a temporary period. For example, real estate investors who are buying and flipping property would benefit from this mortgage by focusing their budget on the redevelopment during the renovation period instead of paying down the mortgage principal amount. Most borrowers who take advantage of this alternative mortgage solution will switch to a conventional mortgage term at the end of the term so they can start paying down the principal mortgage amount.
A specialty mortgage product from alternative lenders allowing borrowers to pay only the interest portion of the mortgage throughout the entire Term.
There are a few things that borrowers would want to know more about this alternative mortgage solution. Contact your local mortgage broker or book a free consultation with one of ours for more details.
Improve Cash Flow
By paying only the interest portion of the loan throughout the Term, borrowers can reallocate their cash flow to other uses instead of paying down the principal mortgage amount.
Bruised Credit Not A Problem
Borrowers with bruised credit can qualify for this alternative mortgage solution as long as they have reasonable explanations and recourse for improving their credit score going forward.
Most borrowers who are using this alternative mortgage solution for flipping real estate properties will switch to a conventional P+I mortgage product at the end of the Term as their exit strategy.
At Richmond Hill Mortgage Broker, we work with lenders who are reputable and have established outstanding levels of customer service, integrity, and compliance with regulatory authorities.
What to Know About Interest-Only Mortgage in Richmond Hill
Interest-only mortgages are one of the more challenging products to get preapproved for. However, they are relatively simple to understand. Before qualifying for an interest-only mortgage, you must know a few key things.
First, you need to get preapproved. You can get preapproved by sending your information to a mortgage lender with access to interest-only mortgage products. This broker will look at your financial records to see if you qualify for the interest-only mortgage.
If you're considering buying a home or a rental property, you'll need to get preapproved for a mortgage. This is a process in which a mortgage broker and lender will review your financial information and provide you with a loan amount you qualify for. It's a good idea to get preapproved before submitting any offer to purchase, so you know how much you can afford to spend. Once you have your preapproval, you can confidently start your home search.
The mortgage preapproval process is also helpful if you are refinancing by comparing quotes from multiple lenders to determine the most suitable one. By getting preapproval, you will better know how much you can borrow and at what interest rate. This can save you time and hassle when shopping for a new mortgage.
Once you have decided on the best interest-only mortgage, you'll need to ensure you have enough money saved to pay off the outstanding balance after your initial interest-only period is up. Ideally, it should be 10% of the entire loan. Finally, you must ensure you have enough income to pay off the loan in the interest-only period without going into the negative.
It's essential to have enough money to pay off your mortgage when your initial interest-only period is up. Otherwise, you'll end up owing a lot of money and could end up in foreclosure. So make sure to create a budget and stick to it so that you can save up enough money to pay off your mortgage as soon as possible.
FAQ on Interest-Only Mortgages
Why Would You Do an Interest-Only Mortgage?
You have many options when you decide to get approved for a mortgage. One of the options is an interest-only mortgage. This is an excellent option for those looking to keep the mortgage payment amount as low as possible. However, it's only recommended if you have the right exit strategy.
Interest-only mortgages have many differences from regular mortgages. Before applying for an interest-only mortgage, you should be clear about the differences. The most significant advantage of an interest-only mortgage is that the monthly payments are much lower because you only pay for the loan's interest portion every month until the term reaches maturity. This is the most significant advantage compared to the regular mortgage, which automatically requires a portion of the principal and interest to be paid regularly each month.
Many real estate investors choose the interest-only mortgage because it allows them to increase their rental properties' monthly cash flow. This extra cash can be reinvested into other areas or used to make mortgage payments more manageable.
However, an interest-only mortgage does not mean you cannot pay the principal balance during the mortgage term. You can pay the principal amount during the term, but it is not required. However, there is a limit to how much the principal amount you can pay down during the term, and any amount exceeding the limit will incur a prepayment penalty from the lenders.
Remember that the mortgage principal and interest are all due at the end of the term. So be sure to have enough funds to pay off the entire principal amount with interest by the end of the term to avoid defaulting on the loan.
Also, interest on an interest-only mortgage is usually higher than on a regular mortgage.
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