So What’s The Big Deal About Interest Only Home Loans?

These Loans No Longer Exist

There are several benefits to the interest only home loans.

Many  first time home buyers will not be able to qualify to buy a home because the payments are to high. But with the interest only home loan it makes the payments more manageable.

Sometimes people can not find anything in their price range that they would even consider living in. So an interest only home loan can increase their purchasing power.

If you live in an area where home prices are appreciating quickly and your are planning on moving or selling your home in 1-10 years it just makes sense to invest the money else where.

You can pay off other debts or make investments into mutual funds with the monthly difference you will be saving.

If you are retired or living on a fixed income the interest only home loan can provide extra cash flow for your living needs.

The interest only option can be applied to most home loans. It may increase your interest rate slightly or you may pay a fee of .125% of the loan amount and keep the lower interest rate.

Here is an example of the difference on the monthly payments with an interest only home loan:

30 Year Fixed Home Loan

Interest Rate of 7%

Loan Amount of $180,000

Principal and Interest Payment: $1197.54

Interest Only Payment:  $1050

That is a difference of $147.54

Think about this. If you were to take that monthly savings and invest it at an annual return of only 8%. By the end of 10 years you would have accumulated a $27,319 investment.

At the same time had you been paying principal and interest you would have only shaved $6,526.19 off the principal. That’s right, you still owe $173,473.81 on your $180,000 mortgage even after 10 years of paying on it.

No wonder more and more people are choosing the interest only home loans.

Here are a few more things to keep in mind about this type of loan.

The interest only option is typically only applied to the first third of the mortgage term. So for example on a 30 year mortgage it would be interest only for the first ten years. What you need to be prepared for is that the loan then has a pay back schedule one third shorter. Again using the 30 year mortgage as an example. After year ten the loan is fully amortized for the remaining 20 years. You payment can and will jump significantly.

At this point you can just bite the bullet or you could refinance. In fact you could refinance into another interest only mortgage if you choose. Keep in mind by the end of ten years your income should have increased significantly and you should be able to make the payments on the increased amount.