Interest Only Home Loans

On the heels of the real estate boom in America, interest only home loans are becoming rapidly popular, typically one out of every five loans processed today are interest only home loans. By definition, an interest only home loan means the borrower only pays the interest on the home loan for a fixed amount of time during the initial loan period. This can be three-, five-, seven- or ten years of interest only payments. After the period has lapsed, you refinance, pay the balance in a lump sum, or start paying off the principal, in which case the payments jump skyward.

Interest loans have become increasingly popular because it allows borrowers to have their dream home without going broke. With today's low interest rates, borrowers can save up to $400 each month, which can add up to $4800 saved each year. While appealing, interest rates are not for everyone, since not everyone manages money well.

Interest only home loans are beneficial for people who:

• Don't plan on living in the home for more than ten years,
• Whose income is mostly in the form of infrequent commissions
• Someone who truly will invest the savings on the difference between an interest-only mortgage and an amortizing mortgage, and who is confident that the investments will make money.

Many who purchase these types of homes use the money that was saved to pay of student loans, credit card debt or invest in something that would yield a higher return. Borrowers who put down small or no down payments and do not pay principal rely exclusively on price appreciation to build equity. If home prices do flatten or fall, borrowers could end up owning more than the home is worth.

Interest only loans can come back horrendously on borrowers, not only because monthly prices increase after the initial period, but payments can also jump if interest rates rise during the interest only period. Even a raise of 1-2 percent can still translate into trouble for the borrower.

Borrowers who take on interest only home loans are successful in keeping themselves afloat if they are honest about their spending. Many see the money as something that has to be spent right away, and end up deeper in debt with little or no options to get out. Ultimately, buyers need to be savvy and disciplined when undertaking an interest only loan.

 

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