Interest Only Loans
Interest only loans have recently become very popular within the last few years, especially with first time home buyers or borrowers looking to save money monthly for a few years. This type of loan, like all loans, has its ups and downs when reviewing why one would choose to pay only interest on the mortgage. Some of the key benefits are easily seen while some of the downfalls may be over looked. Dependant upon your situation, you must weight both the positives and the negatives before choosing this type of loan.
One of the key factors for an interest only loan payment is the monthly price. You do not need to pay the principle portion of your monthly payment for a fixed peroiod of your 30 year term loan. This allows you to have lower payments monthly. If all you pay is interest, the monthly payment can be significantly lower depending upon your rate, the amount of the loan, and other factors. If the housing market is continuously in an incline, you will gain equity without ever making a principle payment. One should note the market does fluctuate in cycles of ups and downs.
A refinance to an interest only loan may allow you to pull cash from the equity of your home and keep a similar or even lower monthly payment. Interest only loans are also very beneficial for investors who will only have the property for a short time. This allows them to make smaller payments during the time they do own the property, in turn, freeing up cash flow to make the needed repairs or other investments at the same time. An interest only ARM will allow you to have a lower rate for the first 3, 5, 7, or 10 years with an interest only payment. Make sure that if you want to be able to sell in a short period of time that you check with a real estate agent, a tax advisor, and possibly an attorney to make sure you are fully aware of the local and state laws that may apply, including tax advantages and disadvantages.
One of the downfalls of the interest only loan is that it never makes a payment toward the price of your home., Although you can make a payment at anytime towards the principle in addition to the monthly interest payment. Imagine only paying the interest (the full interest not just the monthly minimum) on your credit card. You balance due would never go down. If the real estate market does not go up and you don't or can't make a payment towards principle, you will never have equity in your home. If the housing market goes lower, you better be sure you can ride it out by making the loan payments until it goes back up. If you decide to sell and have no equity, you may lose money. Speak with a local real estate agent to learn how to research the market trends and or to find out a professional opinion on the market.
Many smart first time home buyers chose an interest only loan for the first 3 to 5 years then refinance into a fully amortized 30 year loan (paying principle and interest)after the property has appreciated. If you are getting a first and a second mortgage to start off with as a first time home buyer often you can get both of them Interest Only. Please contact us for more information or complete our brief questionnaire for a free quote.
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Rustin Rulenz, Broker - 4475 Mission Blvd #206 San Diego CA 92109
