Interest Only Home Loan

If you prefer a mortgage loan with lower monthly payments, an interest only home loan is the best option for you. In this type of loan, a homebuyer pays only the interest amount as the monthly payment. This means that the principal balance is not a part of the monthly payments and thus remains unchanged.[br]

If you prefer a mortgage loan with lower monthly payments, an interest only home loan is the best option for you. In this type of loan, a homebuyer pays only the interest amount as the monthly payment. This means that the principal balance is not a part of the monthly payments and thus remains unchanged.[br]

 

In the US, the interest-only period typically ranges from five to ten years. At the end of this period, the principal balance is amortized for the remaining years. Once the interest only period ends, homebuyers may pay the principal, enter an interest only mortgage or convert the loan to a principal and interest payment.

Interest Only Home Loan: Advantages

 

Interest-only home loans come with certain advantages to buyers. For instance, those who live in costly housing markets, especially metropolitan cities, typically face difficulty in finding affordable homes. Interest-only home loans enable such borrowers to enjoy lower monthly payments during the interest-only term. They can also start a savings account due to increased monthly savings to easily manage principal payments later on. Lower initial mortgage payments increase the buying power of the mortgage loan. They become able to buy a more expensive property. Another benefit of interest-only mortgage payment is that these are tax deductible.

Interest Only Home Loan: Limitations[br]

Although advantageous, interest only home loans can be equally dangerous. People who are not sure about their ability to repay higher monthly payments should refrain from taking these loans. Interest-only monthly payments are applicable only for the initial years and once the interest-only period is over, borrowers are required to pay increased monthly payments. After the principal balance or the mortgage is amortized, borrowers may have to pay even $500 extra in mortgage payments.

 

Interest-only home loans bear higher rates of interest, since they are riskier for the lender. If you prefer predictable payments, it is ideal to choose fixed rate home loans, where the rate of interest and monthly payments are fixed over the lifetime of the loan. It is advisable to consult a financial advisor or mortgage broker to know which type of home loan will suit your financial condition.