Interest only home equity loan
It is generally seen that people select loans that provide them with low monthly payments and are affordable. This is the reason why the adjustable mortgage loan rates are better known among people who take home equity loans. Besides this option, many people go in for interest only home equity loans. These loans also provide lower rates of interest.
By the term interest only home equity loan it means that you get the option of paying off as much as interest you want during the initial period (interest payment period) of your loan payment term. The most attractive term of an interest only home equity loan is that you decide your payments and cash flow for every month. Besides, your monthly mortgage payments are reduced and you get the option of flexible payments. However, the interest rates are same as the conventional mortgage interest rates.
Second mortgages and home equity line of credit both are considered as home equity loans. In both the cases, you have to give in the equity of the house as your collateral. The home equity loans have a fixed rate of interest traditionally and these rates are lower than the previous mortgage rates. The interest only home equity loan offers the benefit of having a lower monthly payment but this is allowed only for a shorter duration of time. However, the interest payment period differs from lender to lender. The average duration of the interest payment period is ideally seven years but these are some lenders who are generous enough to offer the interest payments up to ten years.
Advantages of taking interest only home equity loans
With an interest only home equity loan, you do not have any risks to the future payments and besides if you wish to sell your house in future you can take an interest only home equity loan. The money that you save on the monthly payments can be used for home improvements and can be used up in future for paying off the educational fees. The interest only home loan serves as a good offer to people who do not plan to live in the same house for a longer duration may be ten years.
The statistics show that people stay in their home at an average of five or ten years. These people often consider making interest only payments towards the loan and tend to save the extra money for investments or other major expenditures like funding educational costs, debt consolidation or purchase of a new car.
The interest only home loan is a good deal for many people but for some it may not be a good option. Besides, people tend to misunderstand these loans and end up taking wrong decisions. Usually people think that if they dont make payments towards the principal amount of the loan then they would not make any equity on their house. Besides the facts show that the houses appreciate by five percent every year and even if the borrower is not paying the principal amount he is still building equity on his house.
Drawbacks of these loans
Some disadvantages are associated with the interest only home equity loans. You are able to make that extra equity on your house only if the value of your house appreciates and not because you pay towards the principal amount. This means that you do not have much equity in your house. Either today or tomorrow you will be liable to pay off the entire amount of loan that you have taken with the interest. Moreover, if the value of the house decreases in the interest payment period then it goes into a loss and you would end up paying more than the actual value of the house.
The interest only home equity loans are a good option for many people but you should be very cautious while availing this type of loan. You should weigh out the pros and cons of the loan and see your financial situation before you decide on the interest only home loan. Apart from this, you should also be aware that once your period for interest only payment ends, you will have to pay both the principal and the interest and your monthly payments would increase. Therefore, you have to be well prepared for this option and decide your finances from before. Besides if you are planning to stay in the house for a long time then you should go in for other type of loan options and build equity on the house. The house serves as your asset and you need to be careful while deciding on it.
Getting approved
Be careful with the terms of the interest only home loan. Make sure that your interest rates are locked and you are not paying more than what you are required to pay. Besides, make sure that you have selected the lender after much survey and research. It is recommended that you carry out a background check on the lender. You should also negotiate with the lender on the monthly payments if you have given a down payment or have paid in points at the beginning of the loan. If you manage to get a low interest loan then it is great, as you can have reduced payments for quite some time. The loan terms should be clarified in the beginning of the term so that nothing remains hidden from you.
Before you decide on the lender, make sure that you have compared the rates of various lenders and you have the best deal that is possible. You can meet several lenders and request them for a quote once you have the quotes then you can compare their rates and decide on which lender to go with. Talk about the interest rates with the lender on the monthly payments ahead of time.
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