Interest Only Loans
An interest-only loan is a loan whereby the borrower pays only the interest on the principal balance, for a set term. The option to pay interest only lasts for a specified period, usually 5 to 10 years. At the end of the interest only term the borrower pays the principal. In other words, if a borrower had a thirty-year mortgage loan and the first ten years were interest only, at the end of the first ten years, the principal balance would be amortized for the remaining period of twenty years.
The primary benefit for a borrower to secure an interest only loan is that the early payments (in the interest-only period) are substantially lower than the later payments. By not being forced to make payments towards principal, this gives the borrower more flexibility, and to borrow more than would have otherwise been affordable.
Common reasons for choosing an Interest Only Mortgage Loan
Interest only mortgage borrowers typically have good reason and justification for preferring the lower initial required payment. Here are some common reasons:
- Pay principal when convenient
- Buy more house
- Invest the resulting free cash flow
- Quick capital gains in trending markets
- Allocate cash flow to second mortgage
- Payment responsive to principal reduction