Pro and Cons of Interest Only Loan
by Eric Morris
Interest only loans are a type of mortgage that provides the option of paying just the interest on the loan for some time of the repayment period. The principle can be repaid after say 3, 5, 7 or 10 years. These loans also allow for a large principle prepayment if desired. After the initial period, the repayments are raised to fully amortized levels. Interest only loans can be fixed-rate mortgages or adjustable-rate mortgages.
There are several advantages and disadvantages of interest only loans. Interest only loans are suitable for people who are expecting increase in the income in coming years; whose income is in the form of indefinite bonuses and commissions and people who will invest the savings made on interest-only loans properly. The main advantages of interest only loans are that the initial interest to be paid is, and it allows for more savings that can be invested some where else, like paying off another mortgage or a high interest debt like credit cards. The extra money can also be invested for a higher rate of interest so that you can earn money on it. Interest only loans are ideal for people who have taken out a loan on a home that they will live in 10 years or less. This enables them to pay just the interest as long as they are in the house and then repay the loan when they move out. The extra money can be used for meeting unexpected expenses like college, or medical expenses, or to finance home improvements. In short, interest only loans enable you to manage your cash flow better.
However, there are also some disadvantages. The interest rate may go up considerably after the interest-only period, significantly increasing the payments. This increases the risk on the loan. Another possible risk is when people plan to repay the loan by selling the house that the loan was taken against. The price of the house may not have appreciated as much as expected. Worse still, the price might have even dropped. Loss of income, a slump in the economy and other unexpected contingencies should also be considered. Or worse, it may even come down, making the sale and repayment difficult. Loss of income, slump in the economy and other unexpected contingencies are also some things to be considered while going for an interest only loan.
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