Interest Only Loans 101
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(The mortgage industry as a whole is always changing and involving to meet with the demands of the current market conditions. )
New loan products are constantly being developed, and some are making headlines lately as being more risky or dangerous than the traditional fixed-rate mortgages of the past.
One such loan is the interest-only loan. This loan is in fact not risky at all if the borrower is educated on how to properly implement the loan into their mortgage portfolio.
An article by Quicken Loans and posted in USA Today’s Real Estate and Mortgage Center, “Interest-Only Mortgages,” gives some pertinent fact on this alternative type of mortgage.
The main difference between this loan and other types of similar loans that are available is that it offers different payment options.
“An interest-only loan is one that gives you the option of paying just the interest or the interest and as much principal as you want in any given month during an initial period of time after your closing. “
Interest-only loans are usually offered with periods of interest only for either three, five, seven or ten years.
Then the loan would adjust to current market rates.
This type of loan product is most appealing to people with incomes that are not consistent, because it gives them the option of how much they want to pay in a given month.
“For many, the most appealing feature of an interest-only loan is that you control your payment amount and your cash flow in any given month during the interest-only period, and your monthly mortgage payment will be lower than it would be with an interest plus principal payment. Your interest rate may or may not be lower than a traditional mortgage, depending on your specific situation, but you will have the option of flexible payments.”
Interest-only are good for a variety of reasons, if used properly. If you locked in your loan at a low interest rate, you could save a bundle by going with an interest only loan.
“On a traditional 30-year fixed-rate mortgage, roughly 70% of the payment goes toward interest during the first six or seven years of the loan. If your interest rate is low, then you've borrowed money at a good rate.”
Then you could take the money that you are saving on your monthly payments and invest it into something that will net you a more profitable return.
“Depending on your loan amount, you could have access to thousands of dollars over the course of several years to invest or reduce high interest debt, including credit card debt.”
This loan is also a good option for borrowers who are planning on staying in their home for less than 10 years.
“The average homeowner stays in their home between five and seven years. As mentioned before, home mortgage payments are mostly interest for the first years of the loan. Many homeowners like the option of making interest-only payments and using the extra money as they please - save for college tuition, make home improvements, or buy a much-needed new car.”
As with any loan, be sure you contact a mortgage broker and financial planner before you make any decisions.
