How Much Would an Interest-Only Mortgage Cost- A Comprehensive Breakdown
How Much Would an Interest Only Mortgage Cost?
An interest-only mortgage is a type of loan where the borrower pays only the interest on the mortgage for a specified period, typically between five and ten years. This option can be appealing to borrowers who want to keep their monthly payments low during the early years of their mortgage. However, it’s crucial to understand how much an interest-only mortgage would cost before deciding if it’s the right choice for you. In this article, we’ll explore the factors that determine the cost of an interest-only mortgage and how it compares to other types of mortgages.
Understanding the Cost of an Interest-Only Mortgage
The cost of an interest-only mortgage is primarily determined by the following factors:
1. Loan Amount: The total amount borrowed will directly impact the interest you’ll pay. The higher the loan amount, the higher the interest cost.
2. Interest Rate: The interest rate on an interest-only mortgage can vary depending on the lender and market conditions. Generally, interest-only mortgages have higher rates than traditional fixed-rate mortgages.
3. Loan Term: The length of time you plan to pay only the interest on your mortgage will affect the total interest paid. Longer interest-only periods typically result in higher interest costs.
4. Amortization Schedule: The amortization schedule outlines how much of each payment goes towards principal and interest over the life of the loan. With an interest-only mortgage, the principal remains unchanged during the interest-only period, leading to higher interest costs.
Calculating the Total Cost
To calculate the total cost of an interest-only mortgage, you’ll need to consider the following:
1. Loan Amount: Let’s say you borrow $200,000 for your mortgage.
2. Interest Rate: Assume a 5% interest rate for the interest-only period.
3. Loan Term: Choose a 10-year interest-only period.
4. Amortization Schedule: Since you’re only paying interest during this period, the amortization schedule will show that the principal remains at $200,000.
Using an online mortgage calculator, you can determine the monthly interest payment. In this example, the monthly interest payment would be approximately $1,041. Over the 10-year interest-only period, you would pay a total of $124,520 in interest.
Comparing Interest-Only Mortgages to Other Types
Interest-only mortgages can be more expensive than other types of mortgages, such as fixed-rate or adjustable-rate mortgages. Here’s a comparison:
1. Fixed-Rate Mortgage: With a fixed-rate mortgage, your interest rate remains the same throughout the entire loan term. This means your monthly payments will stay consistent, and you’ll pay less interest over time compared to an interest-only mortgage.
2. Adjustable-Rate Mortgage (ARM): An ARM has an interest rate that can change after an initial fixed-rate period. While ARM rates may be lower than interest-only rates initially, they can increase over time, potentially leading to higher interest costs.
In conclusion, the cost of an interest-only mortgage can be significant, especially if you plan to keep the loan for the entire interest-only period. It’s essential to carefully consider your financial situation and future plans before deciding if an interest-only mortgage is the right choice for you. Always consult with a financial advisor to ensure you make an informed decision.
