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What is an interest only home loan

what is an interest only home loan


Best Answer: Not sure why you're only being offered interest-only. I'd shop around for other mortgage brokers, just to be sure.

An interest-only loan is where you (for a period of time) make only interest payments. You make no payments against principal. So, unless there is appreciation of the property, you do not build equity.

This is a pro for a few reasons. First, with interest being tax deductible, basically your whole house payment (not including insurance/taxes going into escrow) is tax deductible.

And the payment is lower.

That's why people take them (and maybe why you're only being offered it). The monthly payment is lower.

It's a bad thing because, at some point, you have to pay the principal. If you're lucky, it won't be until you sell. And if the house has appreciated, you'll have the money to pay off 100% of the principal. If the house has depreciated (or has appreciated very little such that your other costs like agent commission are more than the appreciation), you have to find the extra money. A little risky. What'd happen if you needed to sell your house during

a housing bust? If you HAD to sell your house, you'd have to find the money to pay off the principal.

Of course, this is always true. However, when you built equity, you lower the risk with every payment.

You can simulate by saving the principal payment, each month, in your own bank account or investment.

If you are well disciplined, an interest-only loan needn't be a bad thing. However, many of these loans carry bad terms. For example, some loans have a bubble payment in 5 or 10 years. That means that you need to pay 100% of the interest in 5 years, if you've sold or not. You'll then need to refi and (a) interests rates may have gone up or (b) you may be turned down depending on your situation.

But, if you have a fair loan and are disciplined to save the principal payments in your own bank account/investment, they might be fine for you.

This said, an amortized loan should be available to you, even though you switched careers. It just might be at a higher rate.


Jay · 9 years ago

Category: Credit

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