Mortgage advise anyone

Question

whats the diference between a repaiment mortgage and an interest only mortgage??

Answer 1

Interest only is where you only pay interest on the amount borrowed and all the money you borrow stays outstanding and you have to find a way to raise the original amount borrowed at the end of the mortgage term.

Repayment is where you pay interest and an amount of capital and at the end of the term, your mortgage is paid off completely.

Most first time buyers go for the interest only mortgage because repayments are lower and after a couple of years, they can convert it into a repayment mortgage.

Answer 2

Let us say you borrow £100,000 over 20 years.

On a repayment mortgage, each month you will pay the interest and some of the capital back so that at the end of 20 years you owe nothing

With an interest only mortgage you only pay back the interest, so at the end of the 20 years you still owe the lump sum of £100,0000

Answer 3

With interest only, you just pay the interest on the loan, and nothing toward the original amount borrowed.  When you eventually sell the house, the whole original amount is due.  If you are lucky, and homes increase in value in your area, you will be able to walk away with some cash (after you pay the realtor and closing costs).  If you are unlucky, and homes do not increase in value, you may be stuck in a house in which you owe more than it is worth.  Plus, with an interest only loan, your payments will go up over time, as property taxes increase.  Your interest costs will remain high as there is nothing being paid against the original borowed amount.  This helps if you like the tax deduction, but otherwise is expensive.

Repayment mortgages require you to pay the interest plus something toward the orginial balance.  Over time, your interest costs go down as you make payments.  If it is a fixed rate loan, then the payment remains the same (unless property taxes increase).  You build up equity, and eventually you own the home outright.

My recommendation is to go with a fixed mortgage, unless you plan to move out within 5 years, and if that is your plan, stick with renting.  The transaction costs invovled with buying or selling a house are too high to justify buying something for only five years.

Answer 4

Repayment mortgage means that you will clear the debt over time. With an interest only mortgage you will always owe the original amount.