Is there a way to amortize an interest-only mortgage?
Normally, your monthly payments do not include anything to be paid towards the principal during the interest-only period of your mortgage. On the one hand, it makes these payments lower; on the other hand, when the interest-only period is over you have to face the debt you borrowed years ago in its full size again, only now you have a shorter period of time to repay it. That is why it is strongly recommended to make voluntary extra payments towards the principal during the interest-only period, if your lender allows you to. If he does, make sure the outstanding balance gets adjusted immediately after an extra payment is made. Sometimes a special arrangement for extra payments during the interest-only period is included into the mortgage contract. If you are only planning to take out an interest-only mortgage and intend to make extra payments, pay special attention to these details in your contract. The problem is that many lenders do not adjust the balance during the interest-only period at all, with or without extra payments, unless stated explicitly otherwise in the contract. If the balance gets adjusted (becomes smaller), the amount paid as interest (percentage of the outstanding balance) becomes smaller, too. This way your monthly interest-only payments become even lower (provided the rate is unchanged or drops). If the first adjustment will take place only after the interest-only period is over, all the monthly payments during the interest-only period remain unaltered. It does not mean that you will eventually pay more as interest, though. Everything will be recalculated, your extra payments, as well as the overpaid interest, will be subtracted from the balance, when the time comes. The tricky part here lies in the investment opportunities available to you at the time of your extra payments. It may so happen that an alternative investment would have brought you a better return, if you had invested into it, rather than the mortgage, whose return you will see only in a few years.
For more on Interest-Only Mortgages read here.
