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Three
Reasons Why An Interest-Only Loan May Be Right For You
Have
you found your dream home, but is it slightly out of your price range?
Are you looking to buy a new home and invest in other opportunities at
the same time? Do you expect your income to rise in the next few years?
If you answer yes to any of these questions, then an interest-only loan
may be the way to go.
And
what is an interest-only loan? Simply put, it’s a mortgage in which
you pay only the interest for a set period of time—usually the first
five years. After that period, your loan reverts back to the original
terms and your payments are adjusted upwards and you begin to pay back
interest plus principle for the remaining term of the loan. For example,
on a $250,000 interest-only loan at 5 percent for the first five years,
your monthly payments would be only $1,042 as opposed to $1,342 for a
conventional adjustable mortgage. So, in the first five years, you would
pay $18,000 less on your mortgage. Of course, after the five-year period
your payments will go up and you will still have to pay off the full
principle plus interest.
Sound
risky? It may be, but here are three reasons why you may want to take
that chance:
If
you know you’re going to have an above-average increase in income in
the next 5 to 10 years.
With an interest-only loan, you can delay higher payments until a
point at which you are making more money. However, since your mortgage
payments may go up dramatically after the initial interest-only period,
make sure you’ll be able to afford the increase. Many people prefer to
save now and pay later. Just remember that by taking out an
interest-only loan, you’ll have lower payments now, but you’ll still
owe the full principle later.
If
you’ve found a home you truly desire, but it’s slightly out of your
price range.
Let’s say you’ve zeroed in on the perfect home, but you
aren’t quite qualified to buy it. The answer could be an interest-only
loan. With such a loan, you only have to qualify for the interest
payments, which will be decidedly less than a conventional loan’s
mortgage payments. Be careful, however, that you don’t overextend
yourself once the payments adjust upwards.
If
you want to make use of the principal portion of your payment for other
investments.
Want to invest in the stock market? Contribute more to your 401K?
Or maybe just pay off high-interest credit cards? Interest-only loans
are a great way to free up cash that would otherwise be used for
principle. In the previous example, you can see that quite a bit of
money can be deferred to other investments or debts by taking out an
interest-only loan. Once again, though, plan out your future to ensure
that you’ll be able to afford your mortgage once the interest-only
period ends.
Of
course, you should consider all factors before deciding on any loan.
And, as always, make sure to check with your mortgage professional to
see if an interest-only loan is right for you.
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