Interest Only Loans
Experts often don’t always agree on whether the loans are good or bad; it may depend of the type of person getting the loan. Someone receiving an interest only loan might pay only the interest on a loan to buy a house for several years before paying any principal, and the monthly payments can be significantly lower. The catch is when one would start to pay the principal, he might be stuck with huge payments.
A single person who is employed full-time and earning a good salary could possibly find better financing, with a lower interest rate, and pay off the house in less time with a different kind of loan. An interest only loan might also be a bad idea for anyone who is using the extra money to pay for daily living expenses, such as food or clothes, or for other bills.
Someone with a tremendous amount of discipline, however, might be able to save money during the time he or she is paying only the interest on the mortgage and invest the resources safely. That person might end up with enough money to more quickly pay off the mortgage, with money left over. How many people have that much discipline, however?
An interest only loan can be a good thing for someone with a more seasonal job—like a construction worker. When that person would not be working, he or she might enjoy the savings of paying only the interest on the mortgage. During the time that person is working every day, payments could be accelerated, to pay on the principal, not the interest only.
A disadvantage to an interest only loan is that it can be like paying rent, as the principal is not repaid for years, and you would not be building equity in your home. You might not be able to sell your home to raise cash quickly if you had a financial emergency.
Just as an example of an interest only loan, a person buying a $500,000 house, with an interest rate of slightly less than 4% might pay slightly more than $1,600 a month, before interest rates rise, if the rate is not fixed, and before the principal is paid back. While rates might start rising during the time interest rates go up, even before the principal goes up, the payment could jump to close to $5,000 a month when the loan requires the principal to repaid after ten years, if the rate goes up to a capped rate of just less than 10%.
An interest only loan can be a good thing for some people, including those who expect their income to dramatically rise in future years. There are many things to consider when considering what type of loan to get when buying a house, and it never hurts to ask financial advice of a knowledgeable person.