What Are Interest Only Loans?
- By Sam Khalil
- Published 01/7/2012
- Real Estate
- Unrated
The American Dream is to be a homeowner, but for some the budget may not allow this dream. The interest only loan was created with people like these in mind. In an effort to make home loans affordable, lenders have come up with a form of loan that allows the homeowner to only pay the interest on the loan for a specific period of time. The period of time is specified in the loan and after this period the payment will increase.
The interest only loan can be very beneficial for many people. If a home being purchased is $100,000 at a 6.25% interest rate, payment would be $520 a month. This is a significant different payment than would be required under a traditional mortgage agreement. Interest only loans add flexibility, as one may pay more on the payment than required. Any additional payments go directly toward the principal on the home. Many choose not to make additional payments, and use the money for other things. This can be problematic as it creates a false budget by tempting people to spend beyond their means. This can be a big problem when the payment increases.
The advan
tages to this loan are that it allows one to take on a mortgage which one might not otherwise qualify for and allows time to possibly bring credit scores up. It also lets the borrower time to decide if they want a conventional 30 year loan or an ARM. The homeowner will have options to refinance out of this type of mortgage before the interest only period is up.
There are disadvantages to the interest only loan. After the initial interest only period on a loan, the payment can double or even triple each month. A payment increasing in such a drastic manner can be devastating on the budget. There is also a chance that the interest paid during the specific time period is not enough to cover all of the interest owed. The excess interest would then be added back to the mortgage.
There are both advantages and disadvantages for using an interest only loan. If a family thinks they can handle the loan's terms, and are realistic about being able to handle the full mortgage, they should give this loan a try. However, interest only loans can be risky, and if there are any doubts about the risks associated with this type of loan, then one should choose a traditional mortgage loan.
The interest only loan can be very beneficial for many people. If a home being purchased is $100,000 at a 6.25% interest rate, payment would be $520 a month. This is a significant different payment than would be required under a traditional mortgage agreement. Interest only loans add flexibility, as one may pay more on the payment than required. Any additional payments go directly toward the principal on the home. Many choose not to make additional payments, and use the money for other things. This can be problematic as it creates a false budget by tempting people to spend beyond their means. This can be a big problem when the payment increases.
The advan
There are disadvantages to the interest only loan. After the initial interest only period on a loan, the payment can double or even triple each month. A payment increasing in such a drastic manner can be devastating on the budget. There is also a chance that the interest paid during the specific time period is not enough to cover all of the interest owed. The excess interest would then be added back to the mortgage.
There are both advantages and disadvantages for using an interest only loan. If a family thinks they can handle the loan's terms, and are realistic about being able to handle the full mortgage, they should give this loan a try. However, interest only loans can be risky, and if there are any doubts about the risks associated with this type of loan, then one should choose a traditional mortgage loan.
Sam Khalil
First Alliance Home Mortgage is New Jersey's premier Mortgage Banker/Broker. Their experienced Loan Officers provide clients with the latest information on special government programs, equity acceleration, and how to choose the type of loan that best suits their needs. Visit http://www.fahmloans.com/ or call 732-582-3338
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