Interest only advantages - An interest only loan is a loan where you only pay the interest that is due each month. Your principle balance always remains the same. One advantage of an interet only loan is that your monthly payment will be lower, since you arent paying down the balance at all. This gives you more cashflow each month and allows you to manage your finances more efectively.If you are currently having trouble qualifying for a mortgage because your debt to income ratio (DTI) is to high, an interest only loan may be able to help you get your new mortgage. Since the payments are less, your DTI will be lower and it could be enough to qualify you for your new mortgage.
An interest only loan may allow you to buy another property or two if you are trying to become or you are a real estate investor. By lowering your monthly payments you may be able to qualify for more properties with the lower debt ratios that the interest only loans may provide. Interest only loans are great for real estate investors and for purchasing a second home, especially in areas with high appreciation.
Although you aren't required to pay down the balance of your loan with an interest only loan, you still have that option. You can choose to pay more each month if you would like to pay the loan off faster. A competent loan officer should be able to tell you how much extra to pay each month in order to pay off the loan by a certain time. You can choose to pay any amount that is greater than the interest payment.
An advantage of interest only loans is you get to decide how to spend that money every month to benefit you most. Perhaps you want to pay it toward higher rate credit cards. Perhaps you want to pay off your car loan sooner. Perhaps you want the option every month of paying it toward your mortgage or not. Your choice!
An interest only loans payment will decrease as the principal balance is payed off.
The advantage of the interest only payments is the monthly savings compared to an amortizing payment (principal and interest). The basic premise is that in the first 5-10 years of a mortgage you hardly pay any of the principal down to build equity. In most cases the vast majority of equity comes from the increased market value of the home and not the principal balance being decreased by amortized payments
If your home is an income producing property, payments on an interest only mortgage may be fully covered by the rental income, thereby allowing you to own the property without making out of pocket mortgage payments.
If you live in an area that is appreciating quickly, an interest only loan allows you to reduce your monthly payment. The appreciation will build equity in your home even if you don't pay down any principle.
Interest only loans are available with various terms. The interest only period may be anywhere between 5 and 30 years. The longer the interest only rate is fixed, the higher the rate.
Why pay interest only? - Paying interest only is a great way to minimize housing expenses per month. The concept of this type of payment structure is to allow you a set amount of time in which your payments will be based off of interest only. Every borrower should keep in mind that this loan will not pay down any of the principal balance during the interest only portion of the loan.
Why pay interest only - do you think you will ever really pay off your mortgage? How do you gain equity in your home? Is it from paying down your principal or moreso from the market appreciation of your home? When you consider these things paying interest only and having the extra cash flow often makes good sense.
Examine every loan option with your mortgage broker before you decide on a interest only loan program. Your mortgage broker will be able to determine if the interest only option is a good fit for you. This will ensure that you are not frustrated by an uninformed decision years down the road.
Many lenders charge a small premium in order to have interest only premiums, usually 1/8th or 1/4p point. Make sure you discuss this with your mortgage broker as well.
With an interest only loan you will still build equity in your home even if you only make the interest only payments and never apply any extra payment towards the principal. This is achieved because your house is always going to appreciate and gain value (unless you live in a community with declining home values, which is not very common). Therefore, You can still gain equity in your home while freeing up cash to pay down other bills, invest, and/or just to simply put save for a rainy day.
Many people choose interest only loans to increase their cashflow and not be encumbered by such a huge mortgage payment.
Feel free to contact us for a good financial advisor to seek which routes are best for you.
With any type of interest only loan you can choose to make additional payments to reduce your principal balance. These type of loans work very well with borrowers whose income may fluctuate on a monthly basis or borrowers who know they will be receiving a pay increase in the future and want to minimize the monthly payment until they have a larger income.
Interest Only loans allow you to purchase a larger house without increasing your monthly mortgage expense and it gives you mortgage payment flexibility to better manage your monthly cash flow without deferring interest.
Paying interest only may free up needed cash flow to help make payments on an investment property you may want to purchase.
Often times a real estate investor will want an interest only loan. The low minimum payments help to increase cash flow for other purchases.
The use of interest-only loans was unheard of just a few years ago, but in the last year these loans have exploded, giving many home buyers leverage against escalating home prices and enabling them to buy homes. A recent Wells Fargo survey of American homeowners showed that the majority of homeowners do pay principal on interest-only loans when they are flush with cash. 73% pay both the principal and interest at least some of the time. Only 25% pay only interest all of the time. Interest-only options on home loans give the home buyer the flexibility to choose how much to pay on their mortgage each month - just the interest-only payment or a little extra to pay down that principal.
Interest Only mortgages require monthly payment of "interest only" for a specified period, ussually the intial 10 years of a 30 year loan term. At the end of the interest only period, the loan is reamortized to pay off the mortgage in the remaining 20 years. The monthly payments will naturally be much higher compared to that of the interest only period. In practice, most homeowner refinance before the end of the interest only period. The disadvantage of Interest Only loans is in that the homeowner will not build equity during the interst only period. There is also the risk that the home has since lost value when it comes time to refinance.
Paying interest only may allow you to contribute to your 401k, or IRA retirement account, because of your new lower monthly payment.
Interest only loans can also be of value for borrower's seeking to consolidate other debt carrying high interest rates like credit cards. By minimizing your mortgage payment, you can afford to pay down these other debts more quickly.
