Understanding Interest Only Home Loans

Understanding Interest Only Home Loans :

       An interest only loan is a specific type of mortgage loan where the borrower uses a different mode of repayment. In this type of loan, the borrower pays monthly mortgage payments towards repayment of the interest for a specified time period ranging between five to ten years. However, the principal amount remains unchanged during this time period. Even there are options where the interest rate can remain fixed for the entire term or can be variable annually according to the market index. At the end of this period, the loan amount which includes the principal amount needs to be amortized. The borrower can either choose to make a balloon payment, or repay the principal or can even pay monthly installments towards payment of principal and interest.

       There is a unique advantage of an interest only loan. Interest only loans are beneficial for borrowers who prefer lower monthly repayments during the initial years. Once the income increases, the payment towards repaying the principal can be fulfilled. Interest only loans are usually preferred by people who have a flexible and inconsistent monthly income. They may include borrowers whose income is mainly in the form of commissions or bonuses, or those people who are expecting a substantial growth in their income during the coming years. Interest only loans enable these types of borrowers to borrow a higher loan amount than they could have afforded based on their current income.

       Interest only loans are a disadvantage for people who are planning to opt for a long-term loan and also for those categories of borrowers who do not have a definite savings and investment strategy. These loans are an intelligent option for people, who are smart at investing, financially disciplined, willing to take a bit of risk and who are not planning to buy a house beyond their budget range.