Interest only loan payment
interest only loans are those loans in which a borrower repays only interest for a fixed initial period. In this period, there is no payment towards principal amount obtained and thus, it remains as it is. interest only loan payment provides many benefits to borrowers. At the end of interest only period, there are many options available for borrower for interest only payment s. He can go for an interest only mortgage by paying the principal or he can convert the loan for full amortization.
That is, he can choose to repay principal and interest like regular loans. interest only loans are very popular in countries like United States. interest only period allowed by most of lenders are 5 years and 10 years and at the end of interest only period, loam amount is amortized for remaining period. Let us try to understand this with the help of an example. If a person has taken an interest only loan for 30 years with 10 years interest only option, there would be interest payment s only in first 10 years. At the end of this period, interest only loan payment s would be amortized over a period of 20 years and a person is required to make payment towards interest as well as principal. Entire loan amount would be paid at the end of 20 years. Since there is no principal amount payment in the interest only period, there is no reduction in the loan amount balance and at the end of 10 years, it is the same as it was in the starting of loan period.
Lower interest only payment s in first initial years have attracted great numbers of people as they get great payment flexibility. All those people who expect increase in their income or salaries at later stage can take benefit of interest only loans. In fact, these loans have helped many people in affording those homes that they cannot think of in initial years.
As compared to conventional mortgage loans, interest only loan payment pose higher risk for the lenders. This is because value of home or property mortgaged can come down due to depreciation in the prices and since there is no repayment in the principal amount, risk is enhanced. This is the reason why interest only loans are offered at higher interest rates as compared to conventional loans. Another important aspect attached with interest only loan payment is that there is no equity built by the borrower in the interest only period. This is because there is no reduction in the principal amount.
In some cases, borrowers are adversely affected due to prevailing market conditions when they go out for getting refinance or selling property. Even in some cases, due to many circumstances, borrowers find it difficult to afford the amortized payment s. If a person has accepted interest only loan payment s only due to the fact that he would sell the property at higher prices at the end of interest only period, and if there is depreciation in property prices, problems may become so big that borrower has to loose home, property etc. Thus, a person should take decision regarding interest only loans very carefully after understanding the pros and cons and their applicability in his circumstances. Due to speculative effects of prices of properties or real estate, many experts are against interest only loans.
As per the study of Chicago Federal Reserve Board, interest only loan payments can turn to be excellent tools for the purpose of retirement funding for many homeowners. In the study, it was also found that about 3.4 million households in United States do not contribute to their retirement but they go for mortgage payment s. interest only loan payment can prove beneficial for those people that have irregular income and for those people who do not intend to stay in their homes for longer periods. Similarly, if a person wishes to become a homeowner but also requires freeing up funds for investment in other avenues etc, above loans are one of best options available.
If seen from the point of view of investment, interest only loans become unproductive or bad only when prices of home or real estate drop. In such cases, even refinance at fixed interest rates is not possible.
interest only loan calculators have proved very useful in creating affordable interest only payment schedule and in getting all the advantages related to interest only loans. Many people have been able to make prudent decisions through these calculators. Even a person can go for interest only refinance options and can get all benefits attached with it. Amount of payment s after interest only period, which really shot up after later on, can be easily known and decision can be taken. Finding interest only loan calculator is easy as there are many web sites offering this calculator. For getting desired results, some information has to be provided. First is the loan information. It includes loan amount and interest rate. Second is the property information which includes monthly real estate taxes, monthly hazard insurance, monthly homeowner assoc dues and monthly mortgage insurance. Through above information, monthly interest only payment s can be obtained. However, results obtained are estimates and actual payment can differ. For tax deduction, a person should contact tax advisor.
Let us understand interest only loan payment s by taking an example and comparing the same with traditional mortgage loans. Suppose a person has taken a 30 year mortgage loan of $250000 at 7%. In case of interest only loan for firs five year, monthly payment comes to be $1458.33 whereas in case of traditional mortgage, this amount is $1663.26. At the end of 5 years, a person has saved $12295.37. But there are two big drawbacks. First, there is no equity available in the home and second, a person has lost 5 important years of building equity in the home. Thus, decision about interest only loans has to be taken carefully. Due to hasty decisions taken regarding these loans, many people have lost their homes and are in great trouble.
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