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Why Pay Interest Only Paying interest only is a great way to minimize housing expenses per month. The concept of this type of payment structure is to allow you a set amount of time in which your payments will be based off of interest only. Every borrower should keep in mind that this loan will not pay down any of the principal balance during the interest only portion of the loan.
If you plan to refinance in the coming years, or not remain in the home or in the loan you have for the entire term of the loan, than sometimes interest only will be good for you. Just keep in mind that it does not pay down the principle balance on your loan. Why pay interest only - do you think you will ever really pay off your mortgage? How do you gain equity in your home? Is it from paying down your principal or
more so from the market appreciation of your home? When you consider these things paying interest only and having the extra cash flow often makes good sense. Examine every loan option with your mortgage broker before you decide on a interest only loan program. Your mortgage broker will be able to determine if the interest only option is a good fit for you. This will ensure that you are not frustrated by an uninformed decision years down the road. Many lenders charge a small premium in order to have interest only premiums, usually 1/8th or 1/4p point. Make sure you discuss this with your mortgage broker as well. With an interest only loan you will still build equity in your home even if you only make the interest only payments and never apply any extra payment towards the principal. This is achieved because your house is always going to appreciate and gain value (unless you live in a community with declining home values, which is not very common). Therefore, You can still gain equity in your home while freeing up cash to pay down other bills, invest, and/or just to simply put save for a rainy day. Many people choose interest only loans to increase their cashflow and not be encumbered by such a huge mortgage payment. Feel free to contact us for a good financial advisor to seek which routes are best for you. One of the most popular loans for homeowners planning on remaining in their homes for 5 years or less is a minimum payment loan, which creates even more cash flow opportunity than an interest only mortgage by reducing the minimum amount of interest payable in a given month to keep the loan current. Keep in mind that interest only does not mean that you will never have to pay the principal.
If one stays in the interest only mortgage for longer than the interest only period, the loan payment then converts to a principal and interest payment. With any type of interest only loan you can choose to make additional payments to reduce your principal balance. These type of loans work very well with borrowers whose income may fluctuate on a monthly basis or borrowers who know they will be receiving a pay increase in the future and want to minimize the monthly payment until they have a larger income. Interest Only loans allow you to purchase a larger house without increasing your monthly mortgage expense and it gives you mortgage payment flexibility to better manage your monthly cash flow without deferring interest. Paying interest only may free up needed cash flow to help make payments on an investment property you may want to purchase. Often times a real estate investor will want an interest only loan. The low minimum payments help to increase cash flow for other purchases. The use of interest-only loans was unheard of just a few years ago, but in the last year these loans have exploded, giving many home buyers leverage against escalating home prices and enabling them to buy homes. A recent Wells Fargo survey of American homeowners showed that the majority of homeowners do pay principal on interest-only loans when they are flush with cash. 73% pay both the principal and interest at least some of the time. Only 25% pay only interest all of the time. Interest-only options on home loans give the home buyer the flexibility to choose how much to pay on their mortgage each month - just the interest-only payment or a little extra to pay down that principal. Interest Only mortgages require monthly payment of "interest only" for a specified period, ussually the intial 10 years of a 30 year loan term. At the end of the interest only period, the loan is reamortized to pay off the mortgage in the remaining 20 years. The monthly payments will naturally be much higher compared to that of the interest only period. In practice, most homeowner refinance before the end of the interest only period. The disadvantage of Interest Only loans is in that the homeowner will not build equity during the interst only period. There is also the risk that the home has since lost value when it comes time to refinance. Paying interest only may allow you to contribute to your 401k, or IRA retirement account, because of your new lower monthly payment. Interest only loans can also be of value for borrower's seeking to consolidate other debt carrying high interest rates like credit cards. By minimizing your mortgage payment, you can afford to pay down these other debts more quickly.
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Information listed above is to be used for educational purposes only and is not guaranteed
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