Interest Only Home Loans Increase
in Popularity
If you have your eye on a house that is
just out of your price range when it comes to the monthly
payments, you may be in luck. Recent advances in the
mortgage industry have created home loans that cater
to people who can't afford a traditional 30-year loan
on their chosen house. Interest only home loans have
taken the real estate industry by storm, and have allowed
people to afford bigger and better homes than they have
ever dreamed of owning.
The details of interest only mortgages are fairly universal
among banks and mortgage companies, in that the borrower
only pays the interest on the mortgage each months for
a fixed term, usually five to seven years. At the end
of that time period, the borrow then either starts paying
higher payments which are partially applied to the principal
for the first time, pays off the mortgage in its entirety,
or refinances the balance of the loan.
Although not for everyone, interest only home loans
make sense for a select group of individuals. A person
who makes most of their money in the form of infrequent
bonuses or commissions is a perfect candidate for this
program. For someone who makes only a modest salary
but gets a huge yearly or twice yearly bonus, such as
a company executive, this type of exotic loan is a good
fit. The salary can be used to finance the interest
payments throughout the year, and then the bonuses can
be partially applied to the principal in separate payments
to build equity in the house. The homeowner just has
to be disciplined enough to actually apply the bonus
money to the mortgage instead of earmarking it for other
things. Otherwise, after five or seven years, the balance
of the loan will be exactly what it was at the beginning.
Likewise, a person who expects to earn substantially
more in the coming years would benefit from an interest
only home loan as well. If an expected salary increase
is in one's future, why should that person wait until
then to enjoy the house of his dreams? With this type
of loan, the homeowner can enjoy the more expensive
home now, with the anticipation of being able to afford
the higher payments when it comes time to renew the
loan.
Finally, a person who chooses to invest the money that
is saved from an interest only home loan can stand to
benefit from this type of arrangement. Money that is
applied to the principle of a mortgage that is set at
6 ½ percent is the exact same thing as if that
person had invested the funds in a bond that pays the
same percentage. So, if one can guarantee a return of
even greater than that, say at 8 percent, then an interest
only home loan is a good idea, because the homeowner
will enjoy a return of 1 ½ percent greater on
the funds that would have gone to the principal of the
loan in a traditional mortgage.
