An interest-only payment loan is a type of loan in which the borrower is only required to make payments on the interest for a certain period of time (usually 5 to 7 years). After that, the borrower must begin making payments on both the interest and principal. At the end of the interest-only term, the borrower must repay the entire principal balance. Interest-only payment loans can either be fixed-rate or adjustable-rate mortgages (ARMs).
How do interest-only payment loans work?
Interest-only payment loans can be a good option for borrowers who want to keep their monthly payments low during the early years of their loan. However, they do require discipline on the part of the borrower, since it is easy to forget that the principal balance is not being reduced during that initial period.
The benefits of an interest-only payment loan
Interest-only payment loans have several benefits for borrowers. The most obvious benefit is the monthly payments are lower during the interest-only period. This can be a great help for borrowers who are struggling to make ends meet or who are trying to save money for other purposes.
Another benefit of interest-only payment loans is that they can help borrowers manage their cash flow more effectively. By only paying the interest on the loan, borrowers can free up cash each month that can be used for other purposes, such as investing or paying down other debts.
Lastly, interest-only payment loans can also help borrowers qualify for a larger loan than they would otherwise be able to afford. This is because lenders typically base their approval decisions on the monthly payment amount, and an interest-only loan will have a lower monthly payment than a traditional loan.
The drawbacks of an interest-only payment loan
Interest-only payment loans have several drawbacks, the most significant being you’re not building equity in your home during the interest-only period. This can put you at a disadvantage if you need to sell your home or refinance before the interest-only period ends.
In addition, your monthly payments will likely increase when the loan begins to amortize, which can make it difficult to qualify for a refinance down the road. And finally, if you don’t sell or refinance before the end of the interest-only period, you may end up owing a large balloon payment.
Who is an interest-only payment loan best for?
Interest-only payment loans are best for borrowers who:
- Want to lower their monthly payments during the interest-only period
- Are expecting their income to increase in the future and will be able to make larger payments once the interest-only period ends
- Are investing the money they would otherwise be using to pay down the principal of their loan
How to qualify for an interest-only payment loan
To qualify for an interest-only payment loan, you will typically need to have a good credit score and a down payment of at least 20% of the purchase price of the home. You will also need to prove you have enough income to make the monthly payments on the loan.
The process of getting an interest-only payment loan
Interest-only payment loans can either be fixed-rate or adjustable-rate mortgages (ARMs).There are a few ways to get an interest-only payment loan. One is to take out a conventional fixed-rate or ARM mortgage and make only the minimum required monthly payments for the first 5 to 10 years of the loan. At that point, you would need to begin paying both principal and interest in order to repay the loan before it matures.
Another way to get an interest-only payment loan is to take out a specialized type of ARM known as an interest-only ARM. With this type of mortgage, you would only be required to make monthly interest payments for the initial period of the loan, typically 5 or 7 years. After that, your payments would increase to include both principal and interest until the loan is paid off.
Interest-only payment loans can be advantageous for borrowers who are expecting their income to increase over time or who are planning on selling their home before they need to start paying principal on their mortgage. However, because you are not building equity during the initial period of the loan, you will likely end up paying more in interest over the life of the loan than you would with a traditional fixed-rate or ARM mortgage. Additionally, if property values decline during the time that you have an interest-only payment loan, you could end up owing more on your mortgage than your home is worth when it comes time to sell.
Tips for shopping for an interest-only payment loan
There are a few things to keep in mind when shopping for an interest-only payment loan:
- Make sure you understand how this type of loan works and what the terms are.
- Be sure to shop around and compare rates and terms from different lenders.
- Make sure you can afford the payments during the interest-only period and also after when you will need to start paying both principal and interest.
How to make the most of an interest-only payment loan
There are several ways to make the most of an interest-only payment loan. One way is to use it to purchase a home. The interest-only feature of this type of loan can help you qualify for a larger loan amount than you would if you were paying both principal and interest from the start. Additionally, you can use an interest-only payment loan to pay down other debt or to invest in a business venture.
Another way to make the most of an interest-only payment loan is to refinance it after the initial interest-only period expires. By refinancing, you can extend the life of the loan and lower your monthly payments. This can be especially helpful if your financial situation has changed since you first took out the loan.
Finally, you can use an interest-only payment loan to build equity in your home. over time, as you make payments on both the principal and interest, your equity will increase. This can give you a valuable asset that can be used as collateral for other loans or investments in the future.