Income contingent repayment is a scheme whereby the borrower of a home mortgage is expected to pay back a loan amount if he or she fails to earn an income during a specified period. In the process, the mortgagee is supposed to recover the interest and the principal balance as well as the principle. Income contingent repayment is commonly used in case of mortgage loans.
Income contingent repayment is an agreement for the repayments of a loan whereby the income of the borrower is taken into account. The repayment term depends upon the income level that has been decided on. Income contingent repayment can also involve a monthly payment amount and a range of other variables that are decided after the calculation of the income level is made.
There are a few factors that need to be kept in mind when deciding whether to go in for a repayment scheme or not. The most important aspect is the equity that a borrower may have in his or her property. If the mortgage is a fixed rate one, the equity in the property will be a decisive factor in deciding whether the income-dependent repayment is a wise decision or not. A borrower who does not have much equity in his property will have to make use of a variable rate mortgage.
While the mortgage is a fixed rate one, an income-dependent repayment can involve a variable rate mortgage. Even so, it would be wise to make use of some kind of security as far as the income is concerned.
Since income-dependent repayment has been made compulsory by some lenders, there have been instances where the borrower is unable to pay back the loan amount. When this happens, he may have to choose between bankruptcy or foreclosure as per the agreement. He may not get the opportunity to clear his name in court, but he may be able to get the lender to reduce the amount payable under the loan. This reduction will be given on the basis of the income level and the amount of equity in the property.
Debtors should be aware of their options as far as income contingent repayment is concerned. They need to know their rights. In fact, they need to take a look at all their options. They should make sure that they check out all the terms and conditions before entering into an agreement with any lender.
A borrower who opts for a mortgage with an income-contingent repayment scheme will have to do some negotiations with the lender. He must make use of the skills that he has gained through years of experience. He needs to negotiate with the lender and convince him about the best deal possible.
If he is unable to convince the lender about the merits of the income contingent repayment scheme, he can always go in for a refinance deal. This is the best option in the case where the income levels are very low and it is not feasible to pay off the entire loan amount in full.
There is a chance that if the borrower opts for a refinance deal, the interest rates may be increased significantly. In such a scenario, it would be advisable to consider opting for a fixed rate mortgage.
A fixed rate mortgage allows the borrower to get the benefits of the lower interest rates, which would be applicable till the time he is done paying off the loan. Since he does not have to face the risk of a hike in interest rates, he may opt for this option instead.
However, there is an added benefit associated with a fixed rate mortgage scheme. The borrower has the assurance of a steady source of income, which could allow him to fulfill the repayment schedule on time and save the time involved in going through the process.
A borrower should be aware of his options when it comes to income contingent repayment. With the help of an expert broker, he will be able to understand all the terms and conditions related to this type of mortgage scheme.