Sep 19

Demystifying Interest only loans

Demystifying Interest only loans

What is an interest only loan?

An interest only mortgae is a loan where you are only required to pay the interest that accrues on the loan each month and are not required to pay any principal unitl after the initial interest only period has expired.  The typical interest only period is 5 or 10 years.  After the intial interst only period, the payment adjusts to allow for all principal plus interest to be paid back over the remaining term.  Typically 20 to 25 years.  The most common interest only loans are available on adjustable rate mortgages.  Interest only loans may be an excellent tool if they are used in the right circumstances.

 

When can an interest only loan be a good idea?

You may benefit from an interest only loan if a high percentage of your income comes from bonuses, commissions or other lump sum distributions.  Interest only loans keep your required monthly payment to a minimum to allow you to pay the principal on your own timeline rather than a pre-determined timeline set forth by the lender.  Mayny people with this type of income stream tend to pay down a portion of the loan balace once they receive a lump sum or income and when they do so, the required monthly payment on the loan automatically recalculates downward.

 

When can in interest only loan be a bad idea?

You should never take an interest only loan if you cannot afford to property otherwise.  If that’s the case, then you are likely over-extending yourself and should be in a lower priced property or you should consider renting.

Demystifying Interest only loans

Demystifying Interest only loans

What criteria do you need to meet to get approved for an interest only loan?

You typically need at least 10% to 30% equity in your property in order to get approved for an interest only loan.  There may be higher credit score requirement on interest only loans.

Be sure to consult with me to confirm in an interest only loan is right for you.

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