Interest Only Loans: Mortgage
for those who may not have the ability to make a large payment
upfront but have confidence they will be able to make more
sizable payments in the future.
In an effort to provide home loans to people who really can’t
afford a conventional home loan, some lenders offer interest
only loans.
As the name implies, the borrower is only required to make
interest payments on the loan and foregoes making payments
against the principal of the loan. This results in a lower
monthly payment and allows some people who cannot qualify
for a traditional loan to be able to move into a home of their
own.
Technically an interest only loan is not a mortgage, but
rather it is an optional payment plan for a mortgage. With
a standard mortgage a portion of each month’s mortgage
payment goes to pay the interest on the loan and a portion
goes to pay down the principal of the loan. As the years pass
the principal is paid off more and more until, at the end
of the loan, the principal is paid off fully and there is
nothing left for the borrower to pay.
With an interest only loan, the borrow pays only the interest
on the loan for a certain period of years, typically 5 years
or 7 years. At the end of this period of time the borrower
is typically required to make a lump-sum payment of the principal
that was not paid previously and then the loan becomes a more
traditional, fully-amortized loan.
This type of loan is good for people who work on commission
or have other employment without a consistent form of income.
It can also work well for those who have strong reason to
believe that they will have additional income in a few years,
such as students who are taking specialty courses. These types
of loans can also work for people who have investment vehicles
that can guarantee that the money invested will more than
cover the balloon payment that will become due at the end
of the fifth or seventh years of the loan.
It is also possible for an interest-only loan to work if
you plan to sell your property just before the balloon payment
is due and you are confident that the value of the property
at that time will cover the unpaid principal payments.
An interest-only loan is not recommended for most people,
but if you have a special circumstance this is an option that
you may wish to consider.
|
