Interest Only mortgages are a great way to increase your cashflow. Often it is smartest to instead of throwing money at the mortgage to instead take an Interest Only mortgage. This will allow you more money each month to pay off other high interest rate debt.
You should weigh your options when considering an interest only loan. Don't hesitate to contact me to discuss your unique situation.
With most interest-only payment option loans, you can always pay extra towards the principal you owe at any time. When times are flush, pay down that principal. When times are tough, pay only the interest-only payment. You decide.
In areas with high appreciation such as 10% - 20% per year it's not necessary for a person to pay down the principle on a morgage to reap great profits in an investment property. This is where many people use I/O loans along with Neg-Am products.
Often times lower income borrowers or first-time homebuyers will apply for an interest only mortgage. This helps reduce their monthly mortgage cost while still being able to get into a home. Investors buying investment/rental properties will apply for interest only loans reduce monthly debt on their properties while increasing their cash flow from the rental payments.
The easiest way to figure the payments on an interest only mortgage is; loan amount x interest rate percentage / 12. An example of the payments on a $150,000.00 mortgage with a 7.50% rate would be;
150,000 x 7.50% = 11250 / 12 = 937.50
Interest only payments will not reduce the principal balance of your mortgage.
Another advantage of the interest only mortgage is that most lenders allow the borrower to qualify at the interest only payment. Since this payment is lower than a fully amortized payment, the result is that the borrwer can qualify for a larger mortgage, usually meaning a better or bigger house.
Interest Only loans are often utilized by those who expect their income to increase in the near future. College students who are expecting to graduate and professionals getting an advance degree can purchase the homes now which they otherwise cannot afford with their current incomes.
Having an interest only loan helps you to keep your monthly payments low. Although you do not reduce the principle balance of the loan, your house will appreciate over time, thereby building equity.
Interest Only Loans - 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. On a traditional 30-year fixed-rate mortgage, roughly 70% of the payment goes toward interest during the first six or seven years of the loan.
You could take the extra money youd have each month from making interest-only payments, and invest it in something that would bring you a higher rate of return or pay down higher interest debt like credit cards.
First time home buyers often like interest only loans, because it will allow them the flexibility of a low payment when getting their first home. You may pay more than the interst only, the extra amount will go towards the prinicple of the loan.
Interest-only loans make sense for a lot of people but do be careful and consider your own personal situation before making your choice. Remember that the balance due on your mortgage will not decrease over time. If real estate prices continue to rise, you will build equity in your property via those higher market prices. If prices remain level, you build no equity. If prices actually fall, you are left with a mortgage balance greater than the value of your home and will have to come up with the difference if you decide to sell.
Interest Only loans recast monthly, which means that if the balance is paid down substantially, the payment next month will be based off the lowered principal. This can be a vary handy tool for individuals who work off of commission and/or recieve large bonuses and want to lower their monthly payments. Large principal paydowns on regular amortized loans effect will shorten the term of your loan, but they will not lower your payments.
Many of the available Home Equity Line of Credit or HELOCs are Interest Only for all or part of their term.
Remember, mortgage interest is tax deductable. If you pay towards your principle, that portion of your payment is not tax deductable.
Some interest-only loans are offered for borrowers to capitalize on equity building properties, provided it is evident in the appraisal report that equity exists in the property and future appreciation is expected.