Interest Only Home Loan Pros And Cons
Interest Only Home Loan Pros and Cons
What is an Interest Only Home Loan?
Interest-only home loans are mortgages in which the borrower pays only the interest on the loan for a certain period of time, usually five to seven years. During this period, the borrower does not have to make any payments toward the principal of the loan. At the end of the interest-only period, the borrower must begin to make payments toward both the principal and interest on the loan.
The Pros of Interest Only Home Loans
Interest-only home loans offer some advantages that traditional mortgages do not. The biggest advantage is that they often require smaller payments. Since the borrower is only paying interest on the loan, the payments are typically much lower than a traditional mortgage, which requires the borrower to make payments toward both the principal and interest. This can make it easier for borrowers to make their payments each month.
Another advantage of an interest-only home loan is that it can help borrowers save money in the long run. Since the borrower is only paying interest during the interest-only period, the borrower can save money by not having to make payments towards the principal. This can help borrowers who are in a tight financial situation and need to save money.
Finally, interest-only home loans can help borrowers build equity in their home. Since the borrower is only paying interest during the interest-only period, the loan balance decreases each month. This can help the borrower build equity in the home over time.
The Cons of Interest Only Home Loans
Interest-only home loans also have some disadvantages that must be considered. The biggest disadvantage is that the borrower still has the same loan balance at the end of the interest-only period. This means that the borrower must then begin making payments toward both the principal and interest on the loan, which could increase their monthly payments significantly.
Another disadvantage of interest-only home loans is that they can be more expensive in the long run. Since the borrower is only paying interest during the interest-only period, they are not making payments towards the principal. This means that the borrower will ultimately pay more in interest over the life of the loan.
Finally, interest-only home loans can be difficult to qualify for. Since the borrower is only making payments towards the interest during the interest-only period, they may not have the same income or credit score as they would with a traditional mortgage. This can make it difficult for some borrowers to qualify for an interest-only loan.
The Bottom Line
Interest-only home loans can be a great option for some borrowers, but they are not for everyone. Borrowers should carefully consider the pros and cons of an interest-only loan before making a decision to ensure that it is the right option for them.
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