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Interest Only Loans.  The Facts.

An interest only loan is a home loan program where you have an option to pay just the interest for a defined period of the note.  An interest only loan does not mean you will never pay principal.  These mortgage programs simply have what's known as an interest-only payment option attached to  the note.  Some of the most common reasons FOR and AGAINST the use of interest only home financing are listed below.  These reasons may not apply to everyone.

 

Some Reasons FOR Interest Only Financing

  • Greater purchasing power than traditional principal & interest mortgages
  • Attractive low interest rates
  • Existing equity is high and you would enjoy a lower monthly payment
  • Your income is expected to grow in the near future
  • You are paid with bonuses or commissions and would rather make principal payments on your own schedule.
  • You have a high net worth and are simply trying to take advantage of low interest rates.

Some Reasons AGAINST Interest Only Financing

  • The risk & uncertainty associated with rising interest rates
  • The uncertainty associated with future property values (Is the bubble about to burst?)
  • Your income is not expected to increase in the future
  • You are stretching to get into an interest only loan and unprepared for higher monthly payments if interest rates increase.
  • You may find it very hard to use the extra money saved from lower monthly payments in a viable way.
  • It will take longer to build equity if you simply pay the interest only payment
 
 
Benefits of Interest Only Financing
 

Interest only loans come in a wide variety of forms including both long and short term interest rates.  These home loans offer a number of benefits to a broad range of consumers such as:
 
bullet Greater Purchasing Power
bullet Payment Flexibility
bullet Reduced Qualifying Income
bullet Fixed or Adjustable Rates
bullet Unlimited Cash Out *

 
 

Greater Purchasing Power

With many interest-only home loan programs you can benefit from lower qualifying payments enabling you to enjoy greater purchasing power than with traditional mortgages.


Payment Flexibility

Most lenders do not impose restrictions or penalties should you wish to start paying down the principle loan balance at times convenient  to you.  Even if your loan has a prepayment penalty many lenders will still even let you pay up to 20% of your loan balance during any 12 month period without triggering the prepayment clause.


Reduced Qualifying Income

Much like the "greater purchasing power" advantage this feature will allow many home buyers to qualify for a bigger home without having to prove a "bigger salary".  Most lenders state that if your initial interest rate is fixed for a period of three (3) or more years than the borrower can qualify on the "interest only" payment.


Fixed or Adjustable Rates

Interest Only loans come in a variety of fixed and adjustable rate options.


Unlimited Cash Out *

Fixed rates often have strict limitations on how much a homeowner can "cash out" when refinancing a home.   We have seen cases where the homeowner wanted $300,000 and banks tried to charge a higher rate since a fixed rate would only allow $150,000 of cash to the borrower.  Interest Only loans were created for the wealthy many years ago and this was one benefit worth waiting for.  Although the unlimited cash out feature is limited to certain lenders and eligibility requirements there is a program available without incurring a penalty for those of you looking to take large sums of equity from your home.