Interest Only Mortgage: When is it a Good Idea?
An interest-only, mortgage is not a particular type of loan in itself;
instead it is an option that becomes added onto another loan. It works rather
simply. For a predetermined period of time, typically 5, 7, or 10 years, the
buyer only pays the interest portion of the loan amount. After this initial
period is up, the mortgage becomes fully amortizing and the owner is required to
pay both the interest and principal portions of the loan. Because the payment
amount of the loan becomes substantially higher after the interest-only period,
this type of loan is recommended only under the following circumstances:
1. If You Anticipate Higher Earnings in The Future: An interest-only loan might
be a good option for graduate students, medical students or stay-at-home moms
who anticipate entering the job market in the near future. The interest only
period will give these individuals a chance to finish school, or stay at home
with a child without the added pressure of a large mortgage payment. Individuals
can put off employment until this period begins to wind down.
2. If You Anticipate a Quick Sale: If you do not anticipate staying in a
residence or property for very long, an interest-only mortgage might be a good
idea. It could be a great opportunity to take advantage of low mortgage payments
for the short period of the time you intend to stay in the home or property. The
money saved by using this option can be used in numerous ways, examples include,
saving for a future home, investing, or debt relief.
3. If You Are A Real Estate Investor: Real estate investors often use
interest-only loans because they allow investors to take advantage of lower
mortgage payments while they are either fixing up a property and/or looking for
a potential buyer.
4. If You Are a Disciplined Saver: For disciplined savers, the interest-only
option would allow these individuals the opportunity to put away substantial
savings for the initial 5,7 or 10 years of the interest-only portion of the
loan. As long as there is a plan in place for the more expensive payments that
will eventually come, then this might be an option worth considering.
5. If You Are a Savvy Investor: If you are a savvy investor or have access to
one, than using the money that you save with an interest-only loan, to invest,
might be a good plan. Again, this strategy comes down to discipline, coupled
with the necessary knowledge to invest successfully.
Using an interest-only loan can be a smart choice in many cases. These types of
loans work especially well for those who may be short on income for a period of
time, but anticipate increased earning power in the future. They also make good
financial sense for real estate investors, those looking to make a quick sale,
and for the disciplined. Individuals who are considering using an interest-only
loan should take an honest look at their circumstances, temperament and
financial needs before deciding whether or not to use this funding option.
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