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Do you know that an interest-only loan can lower your monthly payment or allow you to buy more houses? Interesting, isnīt it? And thatīs why lenders these days are touting on interest only loans as an answer to many borrowers? prayers. If you are a disciplined investor, capable of taking risk in money matters than this loan may turn up as a blessing to you, else you should stick to the plain-vanilla mortgage system. But even if you go for this mortgage system, you must not buy more houses than you can handle.
The Catch
Unlike most loans, Interest only loans donīt require you to pay back some principal with each payment in the early years of the loan. Here, you pay only a small initial payment and so your payment doesn?t go towards paying down the principal. But in other cases like 30-year fixed rate mortgage or a hybrid loan, the rate is fixed for the first five years.
The interest-only portion of interest-only loans, which comes in various forms, may end after the fixed period, or may continue for a few more years before principal payments are required. The rates of these loans or mortgage can be adjusted annually or fixed for a while, for five, seven or 10 years, before becoming variable. There are some typical caps that determine the level of interest rate that can rise each year and during the life of the loan.
Who Choose Interest-only loans?
There are basically two types of borrowers of interest only loan, the upwardly mobile and the cash-flow crowd. As the same payment on an interest-only loan allows buying about 20% more house so the upwardly mobile people prefers it. Thus if you can afford a $500,000 house on a traditional 30-year fixed rate mortgage, you can easily get a $600,000 place with an interest-only loan. Not only this, it can even lead to an increase in your income in a few years. Cash flow crowd includes those who want a smaller payment for the lean months, while being able to pay down their principal in big chunks when the money comes in. These could be irregular incomes holders like business owners or commissioned salespeople or those of you who is investing the difference.
Not A Long-term Proposition
In case of huge amount of money, interest only loan makes more sense than in case of small amounts where the savings might not offset the loans' greater risk and can?t be drag for long. According to lenders, most borrowers want either to sell their homes or refinance before the interest-only period ends. The typical time in a home is five to seven years before the owner sells or refinances. If you opt for interest only loans you?re passing up the chance to lock in todayīs low interest rates otherwise if you own the house for more than 10 years, itīs better to opt for fixed-rate interest loan.
Conclusion
I would like to conclude here on the note that the interest only loan works well during soaring home price time but may stall at other time. In case you want to sell your house at a time when you donīt have sufficient equity and prices are down then it might lead you to a big loss. By paying down their mortgages, millions of Americans have built up their wealth over the years, skipping which might affect your overall net worth. Though the interest only loan can work for a while, but in the long run most Americans would like to own their own homes and not just rent them from the bank.
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