When it comes to purchasing a real estate property there are many different options available for the first time home buyer or the person who already own a property and is looking into buying a second one. It is difficult sometimes to be up-to-date with the ever changing financial market as there are new products to choose from on a regular basis. If you want to obtain the best possible deal and the best possible home loan option, a thorough research on the available loan products is the first step. Rushed decisions tend to become bad decisions, that is why I always advice my clients to plan ahead and choose wisely.
This article focuses on a very interesting home loan alternative which carries both advantages and disadvantages worth taking into account. If you want to learn more about interest only home loans, read on!
What Is An Interest Only Home Loan?
This type of loan is a sub-group belonging to the mortgage loan group. But it has a major difference that makes it unique. When applying for this type of loan, the borrower will only pay the interest of the property for a specified period of time (usually lasting 5 to 10 years). In other words, during the first 5 to 10 years of the loan, the borrower will only be paying the interest rate on the loan and the principal will remain untouched. If the consumer wants, he will also be able to pay more than just interests, but it is up to each borrower. Another available option is for the borrower to pay interest only for the first years and then repay the loan in full when this period is due.
Here is an example: in a interest only loan of $100,000 at 7% lasting 30 years, the borrower would be able to pay $583 each month for the first 5 to 10 years. This payment consists only of interest. A borrower with the same deal on a regular mortgage would be making a monthly payment of $860.
Who Would Benefit From This Type Of Loan?
It is plain to see that this type for loan is not for everyone. The initial lower monthly payments might be attractive, but the true nature of interest only home loans goes beyond that. You should beware of lenders trying to force this type of loan on you because chances are, they are just trying to make a sale. Following is a list of the types of borrowers who might benefit from this very interesting option.
Case # 1: you have a job which pays wells, but this income is in the form of irregular commissions and infrequent bonuses.
Case # 2: if you are a consummated investor who is planning on investing the savings obtained during the first five years of the loan.
Case # 3: you have a decent income but you are sure you will be earning more in the years to come.
As you can see, this type of loan is not for everybody. If your objective is to purchase a property to live in, and you have a fairly good salary which would allow you to pay both the interest and the principal, chances are you will benefit more from a traditional mortgage loan.
Article by Lara Sawyer
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