An interest only home loan is a vehicle that allows borrowers to pay just the interest accruing on their mortgage for a set period of time before having to make payments that cover both the loan and a portion of the principle. An interest only home loan is considered a form of alternative financing and can enable you to purchase a home that you might otherwise not be able to afford, by providing smaller monthly payment.
Benefits of An Interest Only Home Loan
The major benefit associated with an interest only home loan is that you can own property and enjoy appreciation without having to pay as much per month. For instance if you buy a home for $100,000 and live in it for several years while only paying the interest, the home may appreciate, or go up in value. When the home value rises, you receive equity in your home from the value of appreciation, even though you haven’t paid anything towards the principle you originally paid to buy the home.
These low payments also allow you to afford more house for less. In competitive markets, this can allow you to purchase a home you otherwise would be unable to purchase. This may also be advantageous if you only plan to remain in a home for a brief period. You can pay lower payments during the time you live there, and sell or refinance before the principle payments begin to come due.
Risks of an Interest Only Home Loan
Some investors consider interest only home loans risky, since borrowers don’t get to build up equity in their homes during the first few years of ownership. If property values remain stagnant or fall, you could actually end up owing more on your home than your home is worth. This could make it impossible to sell or refinance, and when principle payments come due and your mortgage payment goes up, you may find yourself with no options. In fact, if you are unable to make these higher payments, refinance your mortgage or sell your home, you could end up facing foreclosure.
Who Should Take an Interest Only Home Loan
If your income stream is rising and you feel confident that you will be able to handle the larger payments at the end of the interest-only-term, an interest only home loan may be an acceptable choice for you. Alternatively, if you are confident that you are going to refinance, move or that the home will appreciate, you can also take an interest only home loan. However, these factors are usually not guaranteed, and when you take an interest only home loan on the basis of what you believe will happen in the future, you could find yourself gambling with your home.
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