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1. You are a First Time Buyer and cannot Qualify. For the first few years of purchasing a home, most of the mortgage you pay goes towards interest, not principal. With the interest only payment option, the lower payments are more manageable and you can use the money you save to pay off other debts or make investments.
2. Cannot find anything in your price range: An interest only loan can increase your purchasing power.
3. If you are retired or living on a fixed income the interest only home loan can provide extra cash flow for your living needs.
3. If you are a `flipper` and buy or live in an area where home prices are appreciating quickly, it may make sense to get a 1-10 year interest only loan and invest the money elswhere.
The interest only option may increase your interest rate slightly or you may pay a fee of .125% of the loan amount and keep the lower interest rate.
Here is how the difference on the monthly payments with an interest only home loan would look:
Loan amount $180,000/30 Year Fixed Home Loan/ Interest Rate of 7%
Principal and Interest Payment: $1197.54
Interest Only Payment: $1050
Difference of: $147.54
If you were to take that monthly savings and invest it at an annual return of only 8%. By the end of 10 years you would have accumulated a $27,319 investment.
At the same time had you been paying principal and interest you would have only shaved $6,526.19 off the principal. That?s right, you still owe $173,473.81 on your $180,000 mortgage even after 10 years of paying on it.
No wonder more and more people are choosing the interest only home loans.
Here are a few more things to keep in mind about this type of loan.
The interest only option is typically only applied to the first 5 to 10 years of the mortgage term after which the loan has a pay back schedule one third shorter. After year ten the loan is fully amortized for the remaining 20 years. You payment can and will jump significantly.
At this point you can continue paying the higher payment or you could refinance. In fact you could do an Interest Only Refinance if you choose. Keep in mind by the end of ten years your income should have increased significantly and you should be able to make the payments on the increased amount. Or you can sell the home to pick up the profit.
The interest only mortgage is not limited to a 30 year fixed loan. There are many options to choose from: eg. an Interest Only ARM, Interest Only Jumbo Loan Or an Interest Only Home Equity Loan.
