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What is an interest only loan?
When you get an interest only mortgage loan, you are required to pay only the interest, as a monthly payment, for a fixed period of time. At the end of the term of an interest only mortgage loan, which is usually 5 to 7 years, you have three options for repayment. You can:
- pay the full principal amount all at once,
- refinance the mortgage, or
- start paying off the principal balance, whereby the amount payable increases.
Who should get an interest only loan?
It is beneficial to those who do not earn a regular income but receive commission or bonuses. It will be helpful to persons who expect their income to increase considerably in the future. It is useful for someone who would like to utilize the difference between an interest only and an amortizing mortgage, by putting gains into investments that will yield good returns. Interest only mortgage is generally not suggested to people who have a regular source of income and who get medium sized home loans. Interest only mortgaging is not advised to people who do not plan to invest savings from their regular income.
How you can lower your monthly payments with an interest only loan
During a non-earning period, an interest only mortgage would allow for the lowest monthly payment possible. Referring to an interest only mortgage calculator, one can determine an amount of payable interest that will be cost effective and help pay off the loan as soon as any bonus is received.
Other benefits with an interest only loan
If you are a business owner with an irregular income, you can utilize your cash flow in the best possible manner with an interest only mortgage. It helps to use the interest only calculator to establish how much interest should be paid. This loan form gives you the option to pay the principal amount at your convenience.
Previously, only the rich went for interest only mortgages. But in recent times, mostly people in a medium or lower income group go for interest only mortgages. An interest only mortgage makes it viable for people who otherwise wouldn't be able to afford it, to own more than one home.
People with fast paced careers, who can see substantial earnings over the years, capitalize on their current buying power by getting interest only mortgages. As mentioned above, getting an interest only mortgage is beneficial to those who invest the money that otherwise would have gone into purchasing homes.
Such investment makes them richer when their investment returns zoom past the rates of capital appreciation of their homes. But sadly enough, not many invest the difference between an interest only and an amortizing mortgage, preferring to spend the money on luxuries.
