As the name implies, interest only home loans are loans that include an option of only paying the interest every month. The principal balance of the loan is paid only when convenient. These loans usually have a fixed or adjustable mortgage rate.
An interest free loan is a good option for borrowers whose incomes fluctuate monthly. The payment of the interest is only is for a limited amount of time, maybe 5 to 10 years. This loan may turn out to be a pitfall to the borrower who fails to pay the principal when they are required to do so. First time buyers often benefit from this loan since they expect to upgrade from their starter home to a bigger home in the future.
An advantage of this loan is that the borrower only has to make low initial payments, thus making them qualify for larger loans. Supposing that the home loan is not the top priority of your investment and you have cash for other investments, this is the best loan.
Make sure that the interest you incur is higher than the interest on the interest only loan. If you have an idea of selling your house in the near future, this loan is the right choice. Of course, if nothing turns out as you had expected to, this loan proves to be a risk to you.
Many dishonest lenders may give the impression that interest only loans have a lower interest rate than other loans, but this is not true. These loans pose as a higher risk for the lender, and thus carry higher interest rates. The main advantage of this loan is that you can deal with unexpected expenses better. You needn’t worry that since you are not paying the principal of the loan, that you’re not building equity in your home. In fact, you are building equity through appreciation.
The most important point in choosing the right loan for you lies in comparing different types of loans to see which loan is right for you. Each loan has a unique situation and understanding its loan structures helps you in making the right decision.
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