What Are the Benefits of Interest Only Loans?
Interest only loans are special types of loans that can significantly reduce your monthly mortgage payments. However, interest only loans are not for everyone. Savvy investors who want to increase their cash flow on an investment property or a homeowner who enjoys taking risks may be well suited to an interest only loan. For these individuals, the loan provides a host of benefits to improve business operations and help save money.
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Low Payments
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As the name indicates, an interest only loan requires that you only pay the interest owed on the mortgage for a fixed term. At the end of the term, you have the option to refinance or pay the balance in full. According to Bankrate.com, the interest only time frame is usually five to seven years. During the fixed term, your monthly mortgage payments are significantly reduced. For example, on a $500,000, 30-year mortgage at 5.75 percent interest, a homeowner could be making payments of $2,918 per month. With an interest only mortgage at a variable interest rate of 3.88 percent, the homeowner would pay $1,615 for the same property.
Variable Interest
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Variable interest rates apply to interest only loans. A variable interest rate is one that adjusts to match market rates. When you obtain a conventional mortgage, your rate is usually fixed and cannot be altered until you refinance. Interest only loans allow you the benefit of paying less money when interest rates are low. If you are a risk taker, this could be a great opportunity for you to capitalize on lower interest rates.
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Cash Flow
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A small business owner that needs cash on hand might benefit from an interest only loan. Business profits are unpredictable, leaving an entrepreneur with lump sums of cash at various times throughout the year. During the slower periods when profits are low, the business owner has a less expensive mortgage payment and can pay off the difference in principal once business picks up again. Since the principal balanced during the interest only term must be repaid, this perk is a benefit primarily for individuals who receive inconsistent lump sums of cash.
Investments
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For real estate investors, interest only loans can free up investment capital and lead to an increased portfolio. An investor may choose an interest only loan because he does not plan to hold onto the home for a very long time. The investor could sell the home in one to two years before the balloon payments are due for much cheaper than it would cost with a conventional mortgage. Obtaining more house for less money allows the investor to maximize his profits.
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