Are you looking for a house you can live in for a couple of years? Or perhaps seeking a financing option that will make it easier for you to purchase a home today? If you answered yes to both, consider interest only loans.
What is an interest only loan?
This type of non-qualified loan allows the borrower to pay only the interest on an existing mortgage. It usually runs between 5 and 7 years, after which the borrower may choose to do one of the following:
- Refinance their home
- Make a lump sum payment
- Begin paying off the principal
A borrower who chooses this option must remember that the loan balance remains unchanged because no payment is being put towards the principal during the first couple of years.
What are the pros of getting this type of loan?
Some noteworthy advantages of an interest only loan are:
- Low monthly payments
- A borrower could qualify for a larger amount on his second loan
- Relatively low monthly payments mean that someone with a hefty sum of cash can divert a portion of his liquid assets towards other investment ventures. When the loan term is up, he would be able to pay a lump sum on the property, while still having extra funds.
- The monthly mortgage for an interest only loan is tax deductible.
How about the cons?
Interest only plans also have these drawbacks:
- Many can’t afford paying off the principal when the loan term is up.
- The home purchased may not appreciate as fast as expected.
- Future income may not match borrower’s expectations.
How do I know if this is the right choice for me?
Apart from the desire to live in a property temporarily, you should only consider interest only loans if you are sure that whatever income you have will increase in the future. Otherwise, you could find yourself at risk of owing more money on the house you bought, since you’ll have to deal with both the combined amount of the principal plus interest each month.