An interest-only loan is a loan in which for a set term the borrower pays only the interest on the capital; the capital remains owing. At the end of the term the borrower may renew the interest-only mortgage, repay the capital, or (with some lenders) convert the loan to a principal and interest payment loan at his option.Interest Only Loans are for borrowers who want to improve their monthly cash flow. Interest Only loans are great for borrowers who expect their home values to appreciate, homebuyers who want to afford a more expensive home, and homeowners planning on selling their home in the near future.
Interest Only Loans offer much lower monthly payments because your principal amount is not included. These programs are good if values in your area are in an upward motion.
Many interest only loans offer the comfort of a 30 year fixed rate loan with the lower payments of interest only for a period of 5, 10 and even 15 years. Interest only loans that do not have prepayment penalties often can be paid ahead by homeowners who desire to lower the principal balance whenever extra money is available. At the same time homeowners can enjoy the benefit of the low required monthly payment.
As mentioned above in a conventional loan you are paying very little towards your principal during the first few years. So if you are buying a home that you intend to improve to increase its value and sell within a few years an interest only loan could be a smart choice.
Interest only loan programs are offered on fixed rate mortgages, adjustable rate mortgages, and on negative amortization mortgages.
An interest-only home loan may also be a good option for people who expect to be in their homes for less than ten years. The average homeowner stays in their home between five and seven years. As mentioned before, 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.
One of the advantages of an interest only loan is the ability to pay more towards your principal every month. For example, if your refinance saves you $300.00 month, you can apply $100.00 of those savings each month towards the principal on your home. You're still saving on your monthly expenses while lowering the balance of your loan at a more accelerated pace.
Interest only loans are an excellent tool for any homebuyer looking to minimize payments.
In addition to being utilized by investment property owners and during an appreciating real estate market, IO loans are often used by those who expect their incomes to increase in the near future, such as professionals acquiring an advance degree.
Although it may vary most interest only terms are for up to 10 years. After the initial interest only period whatever is left on the mortgage is then amortized over the remaining 20 years so you must be prepared at that time to either be able to handle the new payment or be ready to refinance your mortgage.
The payment shock experienced by borrowers in interest only loan programs as they transition from the interest only period to the fully amortized period, often at 3 5 7 or 10 years, is often substantially more than they are prepared for. In fact, many mortgage experts recommend that borrowers considering an I/O loan should have a look at Pay Option ARM loan programs as well, which can present borrowers with a much more progressive transition at the expense of possible negative amortization.
Interest only loans are excellent for investment properties. Small investors can qualify for larger loans to buy properties, including bigger properties, because the monthly payments they would owe are lower, and more manageable in the eyes of the lender. Also, this increases the monthly cash flow from rents. If you are considering an investment property, an interest only loan may just be the right loan for you.
Interest only loans can keep your payments lower but you also are not applying any of the payment towards your principal balance therefore the amount of your original loan is actually not being paid down. This may or may not be a big problem in building equity especially if the area you live in is appreciating well.
Many second mortgage products, particularly Home Equity Lines of Credit, are priced at an interest only payment.
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