What Are the Benefits of a Flexible Mortgage?

Among different mortgage options, flexible mortgages allow you to vary the amount of your payment each month. You might even be able to skip your payments completely for a limited period of time. Interest is calculated on a daily basis to reflect your payments immediately. Lenders offer different types of flexible mortgages with varying features, so shop around before applying for a loan.

TL;DR (Too Long; Didn't Read)

A flexible mortgage offers mortgage options such as making additional principal payments, which are penalty-free, borrowing back additional payments without penalty and the ability to miss some payments without penalty.

The Benefit of Interest Savings

With a flexible mortgage, you can make extra payments or pay more than the required amount every month to reduce your principal balance without penalty. This lowers the overall interest you pay over the term of the mortgage and can offer significant savings when compounded over many years. The benefits are greater the sooner you pay down your principal balance. Making extra payments also helps you pay off the loan quicker so you have more free cash for other investments.

Flexible Mortgages Fit Variable Incomes

Flexible mortgages work well for people with variable incomes, such as seasonal workers, salespeople on commission and freelancers. You can pay more on the loan when you have extra money, and less when your budget is tight. There are no penalties for missed payments within an acceptable range.

Check your loan documents for the exact provisions related to payment breaks. For example, you might only be able to miss a specific number of payments without triggering a change in the terms of your mortgage. Making minimum payments may be sufficient to avoid a break.

Borrow Back Feature

Many flexible mortgages also offer a borrow-back feature. The extra payments you make become available to borrow back when cash is tight. You do not need to file new loan documents or submit to another credit check.

The amount you borrow back is added to the mortgage balance, so you can pay it back over time. When interest rates are fluctuating wildly, it might work to your advantage to pay extra when the rate is high and borrow the funds back when the rate drops.

Flexible Mortgage Considerations

Check the terms of your loan carefully before adjusting your payment amount. Paying only the minimum for multiple months may cause the lender to extend the term of your loan or raise the interest rate. Some mortgages require you to build up your overpayment reserves before skipping any payments.

Make sure you really need the flexibility before choosing this type of loan. You might find that you cannot afford to actually take advantage of the overpayment feature and you will be paying a higher interest rate in exchange for the flexibility. Shop around because you might be able to find only the features you need at a lower mortgage rate.

Flexible Vs. Conventional Mortgage

A flexible mortgage is not your average mortgage because it has different qualifying guidelines. Today's non-qualifying mortgage (non-QM) is not the same as the subprime mortgages that contributed to the housing crash in the early 2000s. Non-QM mortgage lenders have more latitude to underwrite loans, although most borrowers pay higher mortgage rates to get one of these loans.

Non-QM interest rates range from 0.5 percent to 5 percent above what you'll find with a conventional, qualifying loan. But for some borrowers, who have turned up empty-handed when trying to qualify for a conventional loan, a non-QM mortgage is worth paying a higher interest rate.

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