When you make your monthly mortgage payment, part of it goes to pay the bank its interest, and part of it is used to pay down the loan. At least, that's how it used to work. Lenders have now come up with a new type of loan called interest only with alberta mortgage.
Basically the borrower can pay what he wants, provided he covers the minimum of the interest payment. In most home loans, you have the option to pay more than the fixed loan payment, but the difference is that the interest only loan will keep the monthly payment as low as possible.
The concept was believed to be a good one since rising real estate prices guaranteed an increase in the value of the home. Equity was increased by a combination of mortgage paydown and increased home values.
Now that real estate values are falling instead of rising, the logic of interest only loans has been called into question. The only reason that one would want to have an interest only loan is to keep the monthly mortgage as little as possible. This might be valid option if it were a temporary situation.
One example may be when a two income couple temporarily only has one income, for instance if one of them went back to school. The assumption is that he will be in a position to contribute to the mortgage once school is finished and therefore they can make higher payments, see facebook.
Or suppose a home owner has a sporadic type of income, in that he earns very little for a while and then receives a large sum. An example of this may be someone who did project work and was only paid at the completion of each project. It would be in his best interest to maintain his mortgage payments low during the periods of no income and raise them when the large income was received.
In the current real estate environment, not building equity by reducing the loan could be a dangerous solution. Using a traditional loan mechanism, if the property value is lower, flat or only increases slightly, the margin of equity that the homeowner deposited will cover the difference. If no equity has been paid down, the owner will have to find additional cash to pay off the mortgage if home values have not sufficiently improved.
Find out more info about edmonton mortgage rate.
Basically the borrower can pay what he wants, provided he covers the minimum of the interest payment. In most home loans, you have the option to pay more than the fixed loan payment, but the difference is that the interest only loan will keep the monthly payment as low as possible.
The concept was believed to be a good one since rising real estate prices guaranteed an increase in the value of the home. Equity was increased by a combination of mortgage paydown and increased home values.
Now that real estate values are falling instead of rising, the logic of interest only loans has been called into question. The only reason that one would want to have an interest only loan is to keep the monthly mortgage as little as possible. This might be valid option if it were a temporary situation.
One example may be when a two income couple temporarily only has one income, for instance if one of them went back to school. The assumption is that he will be in a position to contribute to the mortgage once school is finished and therefore they can make higher payments, see facebook.
Or suppose a home owner has a sporadic type of income, in that he earns very little for a while and then receives a large sum. An example of this may be someone who did project work and was only paid at the completion of each project. It would be in his best interest to maintain his mortgage payments low during the periods of no income and raise them when the large income was received.
In the current real estate environment, not building equity by reducing the loan could be a dangerous solution. Using a traditional loan mechanism, if the property value is lower, flat or only increases slightly, the margin of equity that the homeowner deposited will cover the difference. If no equity has been paid down, the owner will have to find additional cash to pay off the mortgage if home values have not sufficiently improved.
Find out more info about edmonton mortgage rate.
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