Interest Only Loans

By Jeff Adolph

Residential Real Estate Loans

Many of us have heard of interest-only loans and have possibly even considered using them, but how many of us really know and understand what this type of mortgage is, and what situation they are best suited to?

Simply put, the interest-only mortgage is typically offered over a five-to-ten year term, and allows the mortgagee to pay only the interest monthly on their home loan, rather than the interest and the principal, as conventional mortgages do.

The advantages of an interest only mortgage are:

1) The mortgagee has extra cash monthly to pay off other home expenses and bills;

2) The mortgagee is able to invest the money that they would have paid on their home loan principal in to a high paying account, which will give them a better return for their investment over the long-term;

3) Depending on the type of interest-only home loan that the mortgagee has, they may be able to make voluntary monthly payments off their home loan, in lump-sums, when they have the extra money available, in order to reduce their loan principal and lower their interest repayments. These lump-sum payments may then be able to be re-drawn if needed at a later date should the mortgagee need the money for other purposes;

4) In a normal economy, your homes equity grows despite you not paying off your home loan's principal, this is because home values usually increase at a rate of 3-5% per annum. Therefore if you purchased your home for $500,000 then you can expect it to be worth approximately $650,000 and $750,000 two years later.

The disadvantages of an interest only loan are:

1) Unless the mortgagee makes voluntary repayments that are greater than their monthly interest repayment they will still owe the same amount on their home after five years, which means that the interest the mortgagee is paying will never be reduced;

2) The mortgagee will never actually own their home, unless they pay more than the interest owed monthly;

3) The mortgagor will earn more from the mortgagee's home mortgage than a conventional interest and principal loan, as their debt is remaining constant, unless the mortgagee voluntarily pays off their principal.

Sources:  Quickenloans.com (2008) Interest-only Mortgages - The Facts; available online at http://www.quickenloans.com

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© 2006+ Jeff Adolph GayRealEstate USA

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By Jeff Adolph

Residential Real Estate Loans

Many of us have heard of interest-only loans and have possibly even considered using them, but how many of us really know and understand what this type of mortgage is, and what situation they are best suited to?

Simply put, the interest-only mortgage is typically offered over a five-to-ten year term, and allows the mortgagee to pay only the interest monthly on their home loan, rather than the interest and the principal, as conventional mortgages do.

The advantages of an interest only mortgage are:

1) The mortgagee has extra cash monthly to pay off other home expenses and bills;

2) The mortgagee is able to invest the money that they would have paid on their home loan principal in to a high paying account, which will give them a better return for their investment over the long-term;

3) Depending on the type of interest-only home loan that the mortgagee has, they may be able to make voluntary monthly payments off their home loan, in lump-sums, when they have the extra money available, in order to reduce their loan principal and lower their interest repayments. These lump-sum payments may then be able to be re-drawn if needed at a later date should the mortgagee need the money for other purposes;

4) In a normal economy, your homes equity grows despite you not paying off your home loan's principal, this is because home values usually increase at a rate of 3-5% per annum. Therefore if you purchased your home for $500,000 then you can expect it to be worth approximately $650,000 and $750,000 two years later.

The disadvantages of an interest only loan are:

1) Unless the mortgagee makes voluntary repayments that are greater than their monthly interest repayment they will still owe the same amount on their home after five years, which means that the interest the mortgagee is paying will never be reduced;

2) The mortgagee will never actually own their home, unless they pay more than the interest owed monthly;

3) The mortgagor will earn more from the mortgagee's home mortgage than a conventional interest and principal loan, as their debt is remaining constant, unless the mortgagee voluntarily pays off their principal.

© 2006+ Jeff Adolph GayRealEstate USA

Proudly Sponsored By: