One of the more unusual mortgage options is an interest only loan. This loan option has become very popular, especially as house prices have increased. Without the option of an interest only loan, many people would not be able to afford to buy a home.
Interest only loan programs are developed so that the buyer pays interest only (not any principle) on the loan for a specified period of time. Quite often, the term for the interest only payment is 5 or 10 years. In some cases, these loans are even available with no down payment, so you are not paying anything towards the principle at all until the interest only period is over.
At the end of your interest only time period, you must begin to pay the principle and the interest. The loan payment increases substantially because you are not only paying an increased amount for the principle, but you are also paying the principle for a shorter period of time. For instance, with a 30-year interest only loan, you may make interest only payments for 5 years. At the end of that period you will begin to make payments that include interest and the principle, but the principle amount has been amortized over 25 years, so that at the end of the 30-year period the loan will be paid in full.
Interest only loans are attractive to home buyers that can’t afford a traditional payment on a home loan. As prices throughout the country have increased, many prospective buyers find themselves unable to pay the high cost of real estate. Interest only loans let you pay a fraction of the cost of the home for a brief period of time.
Of course, when you opt for an interest only loan you are not paying anything towards the principle for a brief period of time, so you are not building equity to the home. If you have to sell the home during this period of time, you could potentially lose money because it may cost more to sell the home than you would recoup in profit.
However, the interest only loan can work out well for a number of reasons. Interest only loans are great for people that have to pay two mortgage payments, because a first home hasn’t sold. When the first home sells, they can refinance their interest only loan on their second home and begin to pay towards the principle while earning equity. This loan option is also great for people that anticipate a change in income in a few years.
Interest only loans also work well for individuals that either plan to be in the home for a short period of time but anticipate that they can make modifications and changes to the home to build equity in the property. This loan is often used by individuals that plan to “flip” the home.
Interest only loans may seem a little more risky, but when used correctly, they are the perfect option for people with unique situations. Owning a home can be possible for many people that thought it was impossible – it just takes a little creativity and an excellent loan officer. A qualified loan officer will tell you what options work well for you and what options may not be in your best interest, so that you can finally get into the home you dreamed of.
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