Interest-Only Loan

What Is An Interest-Only Loan

If you’re looking for a type of loan that enables you to get a lower monthly payment, then an interest-only loan might be right for you. However, there can be serious disadvantages to weigh with the advantages of this type of loan. To know it is right for you, please read more information below or get in contact with one of our loan agents.

What Is an Interest-Only Loan?

Interest-only loans are a type of loan that allows you, for a set period of time, to pay only the interest costs of your loan, without any of your payment going towards the principal balance. Generally, these periods of interest-only repayment last about 5-10 years, upon which the monthly payment increases to pay off the principal. This enables borrowers to pay a lower monthly payment for a period of time.

Who Needs Them?

These types of loans have gotten significantly harder to receive since the recession, due to the high risk for both the borrower and lender. These types of loans typically aren’t eligible to be given out through government-sponsored programs (such as Freddie Mac and Fannie Mae). Many interest-only loans are given in conjunction with a jumbo loan.

Pros

• The lower payments can enable you to borrow a higher amount, which increases the price range of homes you can afford.

• The additional money that you save per month, initially, can be put towards other investments, financial goals, or home upgrade projects.

• It provides less financial strain on borrowers who are temporarily short on funds.

Cons

• Any payments made on your mortgage don’t add to the equity that you own of your home. Equity can only be built by paying more than your required monthly payment.

• If your home loses value from the time you bought it to the time you sell it, it means that you will owe more than you can get back from selling. Paying interest-only payments do nothing to help mitigate this risk.

• It is a huge risk to assume that you will be in a better financial position to make larger payments once your interest-only period ends. If you are unable to make those larger payments, you will still be on the hook for a larger mortgage than you can afford.

Is It Right for You?

If you are curious if you qualify for an interest-only loan, or want to know if it is even a good option for you, then don’t hesitate to talk to one of our loan agents today! Our team is qualified to inform you and help you get the mortgage that is right for you and your situation.

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