Interested In an Interest Only Loan
Many in the lending business are pushing Interest-Only mortgages, but they are not a good fit for everyone. An Interest Only mortgage usually is a good alternative for someone whose income comes as commissions or bonuses or who expects to increase there earnings substantially over the next few years. It is also a good choice for those who will take the money that they save and invest it with a confidence that they will have major returns down the road.
An Interest Only loan is not recommended for someone who earns regular wages and does not expect to earn a lot more in the future or does not have an investment strategy.
An Interest-Only mortgage works like this. You will only pay the interest in monthly payments for a fixed term, usually five to seven years. After that time, you can refinance, pay the balance in full or begin paying off the principal. If you begin paying off the principal, expect the payments to be sky high. One thing to remember is you will not build equity during the interest-only term,; however, it will allow you to purchase the house you want, rather than buying the home that you can afford.
Many lenders will advise you that an Interest-Only borrower would ideally be a person who earns a moderate salary, but depends on bonuses on a bi or yearly basis. That way, the payments are possible because they are low most of the time, but a big chunk can be paid off the principal when a bonus check comes in.
In some cases, Interest-Only loans will not save you enough money to be worth the investment. Depending on the amount of money borrowed savings can amount to less than a couple of hundred a month. The more borrowed - the greater the savings. However, Interest-Only loans do offer a borrower a certain amount of flexibility. Initially, you can purchase a better home for much less if you have a future that almost guarantees an increase in your earnings. It gives you the credibility that many feel necessary to maintain and nurture a promising upward career.
The risks, of course, are there, because the house may lose value or the borrower - not matter how bright his or future looks - may lose the job. And, although many tell themselves that they will invest the savings, not all follow through, because it is obviously tempting to spend the savings on other things necessary or not.
I recommend you NOT use an interest only loan and save up to buy the house you want. There is no need to live beyond your means. That is one of the resons why we are now in crisis!
ABOUT THE AUTHOR:
Richard sells real estate in the San Gabriel Valley which is about 12 miles South of Los Angeles. For more information, visit his website at http://www.westsangabrielvalleyrealestate.com
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