Can you get a fixed interest only mortgage? This is a question that many potential homeowners ask themselves when considering their mortgage options. A fixed interest only mortgage is a type of loan where the interest rate remains constant throughout the loan term, and the borrower only pays the interest on the loan each month. This article will explore the ins and outs of fixed interest only mortgages, including their benefits, drawbacks, and eligibility criteria.
A fixed interest only mortgage is designed for borrowers who want the security of a stable interest rate and the flexibility to pay only the interest portion of their loan each month. With this type of mortgage, the borrower’s monthly payments remain the same for the duration of the fixed rate period, which can range from a few years to as long as 30 years. However, it’s important to note that after the fixed rate period ends, the interest rate may adjust, and the borrower will be required to pay both principal and interest, which can significantly increase their monthly payments.
The benefits of a fixed interest only mortgage include:
1. Stability: Borrowers can rest assured that their monthly payments will not change during the fixed rate period, which can help them budget more effectively.
2. Flexibility: Borrowers can use the extra money they save by paying only the interest each month to pay off other debts, invest, or save for emergencies.
3. Refinancing options: If interest rates fall, borrowers can refinance their fixed interest only mortgage to a lower rate, potentially saving money on their overall interest payments.
Despite these benefits, there are also drawbacks to consider:
1. Higher interest rates: Fixed interest only mortgages often come with higher interest rates compared to other types of mortgages, such as adjustable-rate mortgages (ARMs).
2. Higher overall cost: Since borrowers are only paying the interest each month, the principal balance remains the same, which means they will end up paying more in interest over the life of the loan.
3. Risk of default: If the borrower’s financial situation changes and they are unable to pay the increased principal and interest payments after the fixed rate period ends, they may face defaulting on their loan.
Eligibility for a fixed interest only mortgage can vary depending on the lender and the borrower’s financial situation. Here are some general criteria that lenders may consider:
1. Credit score: Lenders typically require a good credit score, usually above 680, to qualify for a fixed interest only mortgage.
2. Debt-to-income ratio: Borrowers should have a debt-to-income ratio of 43% or lower to demonstrate their ability to manage their monthly payments.
3. Down payment: While a 20% down payment is not always required, having a larger down payment can improve the borrower’s chances of approval and potentially lower their interest rate.
In conclusion, a fixed interest only mortgage can be a suitable option for some borrowers, but it’s important to weigh the benefits and drawbacks carefully. Borrowers should also consider their financial situation and future plans before deciding whether a fixed interest only mortgage is the right choice for them.
