09 Feb Interest Only Loan
Why Should You Use an Interest Only Loan?
Interest only loans are quickly becoming the top choice of home mortgage loans these days, and for good reason. There are several benefits of choosing the interest only loan over a traditional 30 year fixed loan. You can experience benefits such as a lower interest rate, lower monthly payment amount, higher loan qualification amount, and much more.
One benefit most people like with an interest only loan is the lower monthly payment amount. Since your payment each month will be interest only, you will not have to pay the extra amount on the principal balance each month as you would with a 30 year fixed length mortgage. Depending on the amount of your loan, this can really add up over a year’s time.
For example, on a $250,000 loan, your monthly payments on a traditional 30 year fixed loan of 6% would be about $1,500 per month. The same 6% rate on an interest only loan would be just $1,250 per month, a savings of nearly $250 per month! What can you do with an extra $250 each and every month? I can think of a few things.
Additionally, with an interest only loan, you will be able to buy more home for your money. This means you will, in most cases, be able to qualify for a larger loan amount. With the way property values are increasing today, banks are comfortable in knowing they will be able to get their money back on a loan they make to you. This means they will be more likely to loan you larger amounts that they would with a traditional home mortgage.
One common concern people have about interest only loans is they fear they will never pay off the home’s balance. While this is a valid concern, the fact is, most people do not stay in the same home for more than five years. With a traditional mortgage, you are paying mostly interest payments the first few years of the loan anyway. You really won’t begin to pay down your mortgage until years 5-10, when you will see a noticeable impact in your remaining balance.
Since home values are increasing so quickly these days, you will still be earning the equity in your home even with an interest only loan. The average property value increase in the US this year was about 10 percent. Depending on your geographic location, you may have experienced similar or better results that that. Some areas in Florida have experienced 30% property value increases each of the last few years.
Let’s look at an example to help illustrate this point.
If you purchased your home last year for $250,000 and your city had a similar increase in property value as the national average of 10%, your home is now worth about $275,000 after one year. Now, if you had an interest only loan, you would still owe $250,000 on the home after year one, however you would still earn $25,000 if you sold the home at the end of your first year.
Now, take that same $250,000 home with a 30 year traditional mortgage. After year one, you will still owe about $248,000 on your mortgage, so the extra monthly payments you are paying on the principle are not really paying down your principle very fast. While you did manage to pay down the principle balance a little, it is not really a dent in the total amount owed. You paid an extra $250 per month in mortgage payment each and every month. That’s month you could have used on a car payment, credit card bill or any number of expenses that crop up in everyday life.
With an interest only loan, you will get to experience the same benefits of a traditional mortgage, such as the fixed or adjustable mortgage rates, payment flexibility and the length of the mortgage (5/1 ARM vs 30 Year fixed). Although you get the same benefits as a traditional loan, you will not have the same headaches as trying to qualify for a traditional loan. Traditional home loans are generally more difficult to get, and seem to be slower to get moving along.
One of the best features of an interest only loan is that they are fully tax deductible. Next time tax season rolls around and you are trying to find extra deductions, you can be pleasantly surprised for once. That’s right, you can actually look forward to tax time! Of course, you should consult your tax professional prior to getting an interest only loan to find the best way for you to maximize your tax deductions. You may be able to get a bigger tax refund at the end of the year by using an interest only loan compared to a traditional mortgage (or pay less in taxes if you are one of the lucky one’s who owe money in taxes each year).
Since you will have a lower payment each month with the interest only loan, you will be able to put that extra money into an investment, which will hopefully earn more money for you, rather than earn money for the lender. There are several places to put your money rather than give it to the bank for your home. You can open an IRA, invest it in the stock market or mutual fund, or perhaps buy another property as an investment.
If you are feeling guilty about not paying on your principle balance of your mortgage, most interest only loans allow you to pay extra on the loan payment, which you can specify to go to the principle balance. Be sure to check your specific loan terms to be sure there are no pre-payment penalties by doing this.
As you can see, an interest only loan is the way to go for your next home loan. Whether you are a first time home buyer or have purchased many homes in the past, they are really tough to beat. Ask your banker or mortgage broker about getting an interest only loan for your next home purchase.
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