Interest Only Home Loans and Interest Only Lenders
What is An Interest Only Mortgage?
An interest only mortgage is a loan that has a lower monthly payment than a traditional loan because interest only lenders require the borrowers to pay just the interest portion of the loan each month.
With an interest only loan, borrowers can pay the interest only, or can choose to repay some portion of the loan balance as they see fit. However, after making interest only loan payments for a period of years (typically 10 years), the amount borrowed must be repaid over a shorter period of time, resulting in a significant increase in payments.
As an interest only lenders typically offer a variety of interest only home loan options, including 30 year fixed rate mortgages and adjustable rate mortgages. The interest only period will last anywhere from 5-10 years. After that time, interest only lenders will require you to make principal payments large enough to pay off the loan before the 30 year term ends.
Benefits of An Interest Only Home Loan
For many borrowers, the most appealing benefit of an interest only home loan is that you control your payment amount and your cash flow in any given month during the interest only loan period. Another benefit is your monthly mortgage payment will be lower than it would be with an interest plus principal payment.
Your interest rate may or may not be lower than a traditional mortgage, depending on your specific situation and the lender, but the benefit of the flexible payment option may help you to finance your dream home
Pros and Cons of an Interest Only Home Loan
- Lower monthly payments during the interest only period – In the payment example below, you can reduce your payment by $478 per month. This is a huge monthly savings if your goal is to keep your payment down.
- You can afford a more expensive home since your payment will be lower – In the payment example below, the savings from the principal portion of your payment means you will be able to afford an additional $80,000 in your home purchase. If you found a home you are in love with but it is just outside of what you can afford, then consider an interest only loan.
- You can re-invest the principal payments into some other investment vehicle – Mortgage money is cheap and interest only lenders are able to help you to find a low rate. You can use the difference in payment to invest in other things. Adding that money into your retirement account or putting it into a college fund can really help you in the future.
- It is a great option if you do not plan to be in the home long term – You may be buying a home to live in for just a few years, or you may be buying a home just to rehab and flip. In both of these scenarios an interest only home loan would be great because you will be out of the home before you have to start making principal payments.
- Your rate may adjust after the interest only period – There are some interest only home loans that are adjustable rate programs. If this is the case, then your rate could increase at some point in the future. Check with one of our interest only lenders about their program to make sure you fully understand whether it is adjustable.
- Your payment will increase after the interest only period – If you are holding onto the interest only loan for a while, then at some point the lender will force you to make principal payments as well. When that happens, your payment could jump up significantly. This is something you need to be fully aware of before you apply for an interest only home loan.
- You risk having your home go under water if home values decline in your area – There are some areas where real estate may be declining. If you plan to put little down on your purchase, then I strongly suggest being careful about getting an interest only loan. Since you will not be paying down the loan with principal payments, you may go to sell the home in a few years and find out that you owe more than the home is worth.
Who Is an Interest Only Home Loan For?
There are a number of good reasons to consider an interest only home loan. For instance, it might make good financial sense. 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. If your interest rate is low, then you have borrowed money at a good rate.
Instead of paying down that low interest rate loan, you could take the extra money you would have each month from making interest only payments and invest it in something that would bring you a higher rate of return.
Depending on your loan amount, you could have access to thousands of dollars over the course of several years to invest or reduce high interest debt, including credit card debt.
An interest only home loan may also be a good option for people who expect to be in their homes for less than ten years. The average homeowner stays in their dream home between five and seven years. As mentioned before, home mortgage payments are mostly interest for the first years of the loan anyway.
Many homeowners like the option of making interest only payments and using the extra money for other needs such as saving for college tuition, making home improvements, or putting away for retirement.
Interest Only Loan Calculation
Here is an example of what you can expect from interest only lenders when it comes to your payment. You can see the difference between a traditional loan and the interest only loan at 6%.
Loan Amount $400,000
Interest Only Payment $1,919.50
Principal Payment $478.70
Total Payment (P&I) $2,398.20
Monthly Savings with the interest only mortgage is $478.70. That difference in payment means you can afford an additional $80,000 with an interest only home loan.
Best Interest Only Lenders Rated by Nerd Wallet*
- New American Funding
- Navy Federal Credit Union
- Guaranteed Rate
*These were rated as the best interest only lenders by Nerd Wallet. Keep in mind that these are essentially advertisements for Nerd Wallet and they get paid by these companies.
Let us help you to find the best interest only lender for your scenario and in your state. Complete our free consultation form and someone will get back to you.
Common Misconceptions About Interest Only Loans
Interest only lenders would like to make sure you understand the truth about these loan programs. While an interest only home loan may be an appealing option to many, there are a number of common misconceptions that you should be aware of prior to making any final decisions.
One common myth is that if you are not paying down your loans principal, you are not building equity in your dream home. This is not necessarily true. Homes in the U.S. have been appreciating between 5 and 6% a year. Chances are that even if you are not paying down your principal, you are building equity in your home through appreciation.
During a time of declining real estate values, it would make sense for borrowers who have loan balances that are close to the actual value of the home to make principal payments.
Interest only loans can be beneficial for individuals who do not plan to own the home for very long or who have had a significant decline in income. The obvious position is that you should be paying down your loan balance. In fact, we recommend a 15 yr fixed mortgage so you can be mortgage free much sooner.
Do banks still offer interest only home loans?
Interest only mortgages are still available, but many traditional banks do not offer them. They are available through some niche portfolio lenders.
Are interest only mortgage rates higher?
The interest only mortgage rates can be slightly higher. However, your payment will be significantly less. You also have the ability to buy down that slight rate difference.
Are interest only home loans safe?
Interest only home loans are safe as long as you are smart about your financial situation. The one key factor is whether you believe the home value will decline or increase over time. If the value increases, then you have little to no risk. If you are in a declining market, then you risk having the home go under water if you put very little down on the home when making the purchase.
Related Articles – Interest Only Home Loans
Could You Handle An Interest Only Loan ? – MSN Money
The Pros And Cons Of Interest Only Loans – CNN Money