Interest-only loan: Is it the Right Loan for You?
By Sadiya Anjum
Interest only loans can be very tempting to people who cannot really afford to buy the bigger home they are looking at or cannot shoulder the heavy monthly payments. But despite the temptation, these loans are not made for everyone especially not for those who are just scraping enough money to buy their new home.
Interest-only loans are hugely popular for their low monthly payments feature. Basically an interest only loan is when the monthly payments for a fixed period of time include only interest. When that term ends, the borrower is required to repay the capital, renew the interest-only loan itself or more commonly, start paying the principal along with the interest every month.
Assuming the mortgage is taken out for a 30-year period, perhaps for the first 10 years you are required to pay only the interest. Post this first decade, you have to cough up for both the principal and the interest. If a person is positive that his income will rise in a few years but cannot scratch up the money required immediately, an interest only loan may make sense.
The major problem with interest only loans is the interest rate. The interest rate is variable although it may be fixed for a certain period initially. Once the rates increase, the borrower will have to suffer this as well as the monthly payments for the amortization of the principal. For the first few years, this loan may look good but when you have to put up with variable interest rates and pay off the principal later, you may want to reconsider. You do not want to spend the later years of your life putting up with high monthly payments.
So should you or should you not get an interest only loan? Well it depends on your situation. If you are looking to secure a property/ home immediately, as temporary financing it may be suitable. An interest only loan is meant for a short period of time. Most people looking to sell the home/ property in a few years will benefit from this loan. If you are financing a home to stand till you breathe your last, then mid-way through your term period you may have difficulties trying to make your monthly payments. At that time, you may even regret not having locked in the fixed interest rate today. Also the important thing to remember is since you are not repaying your principal, you are not really building any equity on your home.
It is most beneficial if you are an investor flipping properties or if you just have a temporary cash flow problem. This loan could fix that provided you know that the lack of money is definitely temporary. Otherwise you may want to shop for another kind of loan because it really is not worth risking the roof over your head unnecessarily.
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