Interest-Only Loans

Since every borrower has different circumstances, mortgage lenders offer dozens of options to suit the requirements of each lender. One of the most interesting options available today (if you’ll excuse the pun) is the interest-only loan.

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Interest-only loans are home loans designed for borrowers who expect their income to increase dramatically in the future, but would like to maximize their spending power in the present. With an interest only loan or interest only mortgage refinance, the borrower repays only the interest accrued on the principal as a relatively low monthly payment, while the principal of the loan remains untouched.

The point of an interest only loan is that if, say, a young professional wants to buy a home he or she can buy it now, make the monthly interest payments (metaphorically keeping their seat warm) and then begin to pay down the principal at a later date when his or her income increases.

The interest-only loan can also come in very handy for people whose income comes mostly as large but infrequent bonus payments. During lean months they can simply cover the interest, and when a bonus comes along they can make a lump sum payment to take a bite out of the principal.

While the interest-only loan is possibly the most flexible type of home loan available today it should also be noted that it takes a responsible borrower to get the most out of it. If the borrower doesn’t have a strong plan of action the loan can end up costing much more in the long run than a regular mortgage.

The moral, of course, is that the borrower should ensure that they will be able to make occasional large payments on the loan. If they are sure they will be able to achieve this goal, taking an interest-only loan really could be the smartest move they ever make.