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Interest Only

Posted by  on Apr 16, 2009
 
Selecting your mortgage is a very important financial decision and it is good to understand the finances that you will be undertaking and the way in which you will be choosing the mortgage and the mortgage rates. If you are going to take out a loan to pay for your mortgage, an interest-only loan is one that gives you the option of paying just the interest or the interest and as much principal as you want in any given month during an initial period after your closing. At Shoprate.com, you can find a variety of interest-only home loan options, including thirty-year fixed-rate mortgages and adjustable-rate mortgages. Our interest-only home loan programs are offered as interest-only loans for periods of either three, five, seven or ten years.

For many, the most appealing feature of an interest-only loan is that you control your payment amount and your cash flow in any given month during the interest-only period, and your monthly mortgage payment will be lower than it would be with an interest plus principal payment. Your interest rate may or may not be lower than a traditional mortgage, depending on your specific situation, but you will have the option of flexible payments.

On a traditional thirty-year fixed rate mortgage, roughly seventy percent of the payment goes toward interest during the first six or seven years of the loan. If your interest rate is low, then you have borrowed money at a good rate. Instead of paying down that low rate loan, you could take the extra money you would have each month from making interest-only payments, and invest it in something that would bring you a higher rate of return. Depending on your loan amount, you could have access to thousands of dollars over the course of several years to invest or reduce high interest debt, including credit card debt.

An interest-only home loan may also be a good option for people who expect to be in their homes for less than ten years.
The average homeowner stays in their home between five and seven years. As mentioned before, home mortgage payments are mostly interest for the first years of the loan. Many homeowners like the option of making interest-only payments and using the extra money as they please, save for college tuition, make home improvements, or buy a much-needed new car.

While an interest-only loan may be an appealing option to many, there are a number of common misconceptions that you should be aware of prior to making any final decisions.
Homes in the U.S. have been appreciating between 5 and 6% a year. Chances are that even if you are not paying down your principal, you are building equity in your home through appreciation.

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