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What Opting For an Interest Only Loan Means
When you go choose an interest-only home loan, it means that you will only pay the interest monthly for a specified period. Usually, the terms period lasts for up to seven years. Once the term is over, many borrowers would choose to refinance their homes. Others opt to make a lump-sum payment, or they pay off the principal of the loan. However, it means that the fees will increase. This arrangement does not result in chipping away at the principal of the loan, and at the end of the predetermined interest, only period borrowers must decide which of the four typical options to take going forward. These options are:
- Repay the balance of your home loan
- Make payments to your lender for principal and interest
- Refinance with a new lender
- Set another period of interest-only payments with your lender
You may be among those future homeowners who want to get the funds they need through an interest-only loan. As the name suggests, you will only have to pay the interest first. The payment you provide will not go towards the principal.
The balance will not change unless you pay extra. It helps to calculate your monthly payments to be sure you can afford this loan and if it will truly benefit you.
Is An Interest-Only Home Loan Right for You?
This type of home loan is best for those who wish to purchase the home they want as soon as possible. If you know that the house has attracted other interest, it is always a good idea to act swiftly. However, this may not be possible because you do not have the funds readily available to purchase the house. In this case, taking out a loan is an excellent strategy.
If you wish to make an initial payment that is lower than the standard loans on the market, an interest-only loan is worth considering. You may not be confident in your ability to repay the loan now. However, as time passes, you know that you can deal with large pay increases. If this suits your financial situation, then this type of loan is a helpful step towards becoming a homeowner.
Finally, if you are certain that you can get a higher return on your investment elsewhere, you can pay for the interest first. This way, you can have enough money to fund your other ventures. This strategy works well for investors.
An interest-only loan is a good option for investors who will claim the interest payments as tax deductions and then pay off the loan when they sell the property. It can be helpful for first time home buyers who can enter the housing market sooner because of lower payments.
Why Should You Choose an Interest-Only Loan?
Just like with any home loan type, an interest-only loan has its pros and cons. Here are the advantages of going for this loan:
- At the beginning of the loan, you do not have to be worried about high repayments.
- An interest-only loan is great for beginner homeowners. It gives you enough time to build your funds so you can afford the payment for the principal loan afterwards.
- You can have the ability to purchase a bigger home later because you may be able to qualify for a larger amount of loan.
- This type of loan will also allow you to place extra money into other investments. It will help you build your net worth.
- During the interest-only period, the monthly payments may qualify as a tax-deductible.
Although an interest-only loan is beneficial for many cases. It may not be suitable for you if:
- You are worried about increases in mortgage rates.
- You spend your extra money instead of purchasing another investment.
- You cannot afford principal payments after the interest-only period ends.
- Your income will not grow when it is time to make principal payments.
Some homes may not appreciate as quickly as you like as well, which can affect your decision to get an interest-only loan.
There are certain risks to know about when you go for this type of loan. One important thing to remember is that you should focus on the principal payment and not the interest. Repaying the interest is easy for many people. However, they start to struggle once it is time to repay the loan amount.
These risks, however, can be mitigated with the help of smart financial planning. If your current income is modest now, but you are sure that it will increase in the future, an interest-only loan may be useful for you.
If the equity in your property is sizeable and you can use the money so it will go towards your other investments, you may be able to afford this type of loan.
The temporary ability to pay only the interest cost can be beneficial for many people. You do not have to pay down the loan balance, which gives you plenty of time to have the budget for the future. Contact Quantum Finance to learn more about this type of home.