Interest Only Loans What You Need To Know

Interest Only Loans – What you​ Need to​ Know?
If you​ are shopping for a​ house or​ refinancing,​ you’ve probably seen ads for interest-only loans .​
While this type of​ loan is​ beneficial for some homebuyers,​ other homebuyers might regret the​ decision to​ take out an​ interest-only loan.
Interest-only (IO) loans are structured so that the​ borrower pays the​ interest every month .​
The borrower is​ not required to​ pay on​ the​ principal balance,​ although the​ borrower does have that option.
Usually,​ this option to​ pay interest only lasts for a​ limited period of​ time,​ typically between 5 and 10 years.
This type of​ loan can benefit borrowers who have fluctuating incomes,​ or​ who expect to​ see an​ increase in​ their income sometime in​ the​ near future .​
Because the​ borrower has the​ option of​ paying on​ the​ principal when it​ is​ convenient,​ some borrowers feel more comfortable with IO loans,​ rather than other types of​ loans that require payments on​ the​ principal each month.
However,​ if​ the​ borrower does not pay down the​ principal at​ all,​ then the​ entire balance will be due at​ the​ end of​ the​ term .​
With IO loans,​ any unpaid principal must be paid or​ refinanced when the​ term is​ up.
Homebuyers looking for a​ starter home often choose IO loans,​ because they expect an​ increase in​ income to​ upgrade into a​ second home sometime soon.
For homebuyers who wish to​ maximize their options,​ IO loans can be helpful because they require a​ lower initial payment,​ which means the​ borrower can usually qualify for a​ bigger loan.
Borrowers with other high-return investments can also profit from interest-only loans,​ as​ the​ increased monthly cash flow allows them to​ put money into stocks,​ or​ into their own business .​
When the​ other investments earn more interest than the​ interest rate on​ the​ IO loan,​ this is​ a​ profitable option.
Buyers looking for real estate in​ rapidly appreciating markets might benefit from interest-only loans as​ well .​
If you​ expect to​ flip your home – that is,​ resell it​ in​ the​ near future at​ a​ profit – an​ IO loan might be the​ smartest choice.
Interest-only loans do carry risks for the​ borrower .​
What if​ the​ expected higher income never comes? What if​ you​ expect to​ resell your house,​ but cannot find a​ buyer or​ a​ profitable offer? And not all borrowers can bring themselves to​ pay down the​ principal when they are not required to​ do so.
With predatory lending on​ the​ rise,​ be wary of​ lenders who offer interest-only loans at​ a​ lower interest rate than other types of​ loans .​
IO loans typically carry a​ higher interest rate than loans without an​ interest-only option .​
Be suspicious of​ low rates on​ interest only loans.
Another common deception is​ that IO loans allow the​ borrower to​ avoid paying for mortgage insurance .​
This is​ never the​ case .​
Because IO loans are riskier for the​ lender than other loans,​ lenders will require mortgage insurance on​ the​ loan.
Every situation is​ unique,​ and the​ key to​ making a​ sound financial decision when it​ comes to​ comparing loans is​ to​ understand your options .​
There are many types of​ mortgage loans to​ choose from,​ and one of​ them is​ surely best for you​ .​
Understanding how the​ loans work is​ the​ first step in​ choosing the​ right one.

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