What is an Interest Only Loan?

The wide variety of different mortgages that home buyers have to choose from, make it possible for different income levels to afford a mortgage payment. Even investors will take notice with options made available to them before investing in property for renting purposes or reselling purposes. The most notable types of mortgages are identified with their form of interest payments. Variable rate mortgages, fixed mortgages, adjustable mortgages and interest only loans are the most popular types of mortgages on the market. Each one of these mortgages operates differently from each other that will fit the goals of a certain home buyer.

An interest only loan is a type of mortgage loan that charges interest payments only on the mortgage. In other words, the principal of the mortgage isn’t being paid on; only the interest created from the principal is being paid. However, an interest only loan has a certain term in which the borrower will be required to start to pay on the principal after the term is over. An interest only loan can provide many benefits to the homeowner. For example, a mortgage loan that only requires the interest to be paid in the beginning, allows the homeowner to use the extra cash in other investment opportunities.

Homeowners opt for an interest only loan when they have a specific financial strategy in mind, like funding a retirement. The extra cash that a homeowner will have access to every month can be used to start a retirement fund that will earn interest over the years. Homeowners with an interest only loan can also use the extra cash to send their child to college. College is expensive, and having the funds to secure a child’s education is extremely important to a parent. Investors who study the housing markets and are able to predict when home values will go up are also involved with using an interest only loan.

If the homeowner is planning on selling their home before they make payments on the principal, they homeowner will need to sell the home for the amount that they have financed. If the current housing market values are down, the homeowner will be upside down on their mortgage when trying to sell the home. However, if the housing market values are up, the homeowner will have the opportunity to sell their home before actually ever paying on their principal.

Interest only loans typically have a period of either 5 years or 10 years. A homeowner will begin to pay on their mortgage’s principal once the interest only period has been matured. At this time, the homeowner will experience higher payments on their mortgage. Both principal and interest may be charged on an interest only loan after the interest only term has been achieved. Individuals who are planning on staying in their home during the life of their mortgage should make preparations for the higher monthly payments that will be required of them. This type of home loan is a perfect option for those who are expecting to earn a higher income down the road.

Homeowners have the option to do whatever they want with the extra cash they will have on hand during the years of paying only the interest. The money is used for a wide variety of investment opportunities and other financial strategies that drives interest only mortgage sales. Refinancing a home under an interest only loan is also an option that homeowners will take advantage of. In fact, once the interest only term is up, the homeowner can refinance their mortgage if they choose to do so. With all the different types of mortgages made available, most homeowners can effectively choose the right mortgage without struggling during a tough economy.