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February 26, 2013What Are Interest Only Loans?
If you choose interest only loans then it is enough to pay only the interest on the borrowed money. So how it works? Let’s find out.
When you sign up with the interest only loans your principle amount will not get reduce until your interest only period gets over. When it expires the home buyer is allowed to take one of the 2 options.
Option 1
You can convert your interest only loans into an amortized mortgage loan where you need to pay the premium on the interest and principle on a monthly basis.
Option 2
The home buyer can convert the loan into interest only mortgage here the borrower should make the repayment on the mortgage.
Duration
Duration of interest only period is subject to change according to the country you live in. in the united States the duration of interest only loan ranges from 2 to 10 years. What it means is if the home buyer chosen the 30 year mortgage then paying the interest alone in the first 2 to 10 years is enough. It is purely based o the decision of the borrower and lender of the mortgage.
Advantages of interest only loans
Once the interest only period gets over then the amortization term will come to charge. One of the main advantage of the interest only loans are “during the interest only period borrower can pay the amount much lower than what he is going to pay on the later period”. So it makes the buyer to buy a home instead waiting for the better times to come along. They can save the portion of repayment amount in some high interest yielding accounts and use the money for the loan repayment.
If you have a hope on your salary appraisal in the upcoming years for sure then you can even buy more than what you can afford at present. But on the flip side when the interest only terms gets over unless you make an occasional payments on your principle the whole large sum amount will remain the same.
In many countries these interest only loans are getting more popular over the time. The reason is people can buy any asset now and can pay later. The value of the property is not going to get decrease when you invest in the real estate. So even the home buyer is not in the situation to repay the principle amount he can simply sell it to someone and can pay off the debt. In some countries people are allowed to combine these interest only loans with some other financial options such as corporate bonds.
Before going for these loans you should evaluate your finance using the Interest only loan calculator. Just as all other loans, interest only loans have its draw backs. Sometimes getting the interest only mortgages require the home buyer to pay the property taxes and take the pmi mortgage insurance. This pmi insurance helps the lender to get at least the down payment paid on the mortgage and the 20% of the mortgage amount from the insurance company.
Interest Only Loan Calculator
You can calculate the interest you need to pay on the mortgage every month using the interest only loan calculator. Principle amount, interest only period and the annual interest rates are some of the key terms by using which this calculator will return you the appropriate interest rate.
