Interest Only Home Loans - The Facts
Are interest only home loans right for you? In an LA Times article, Jack Guttentag, wrote: ..."the interest-only loans of today are interest-only for a specified period, usually five to 10 years. At the end of that period, the payment is raised to the fully amortizing level. In such cases the new payment will be larger than it would have been if it had been fully amortizing at the outset".
Interest only home loans are a ruthlessly marketed product but they may not suit everybody. So who benefits from interest only loans?
Interest only home loans may be a good idea if your income is derived mostly from erratic commissions or bonuses. They are also a good idea for those who believe that their income will increase dramatically in the next few years such as those studying medicine or young business executives on the fast track.
If you can be diligent about investing the savings obtained from interest only home loans vs. an amortizing mortgage, this type of loan may be ideal. You will also need to know that these investments are definitely going to be profitable!
Experts tell us that interest only home loans are not suited for the ordinary wage earner - especially if their mortgage is at the medium level. If you don't know how to invest your savings to earn profits it's a definite no-no.
Interest only home loans mean you pay interest on the loan each month for a pre-determined fixed time. After this period has expired (about 5 to 7 years) you need to decide between refinancing, paying the balance in a lump sum or paying off the principal amount - the latter will see your payments skyrocketing.
If you know that bonuses or commissions are in the cards for you, you can use them to pay down your principal when the time comes. If you have an erratic income from a business you can pay less during slow months and use boon times to pay the principal on interest only home loans.
For those of us with low, steady incomes who buy cheaper homes, interest only home loans won't save enough cash to make it worthwhile. For high-flyers on the fact track there are some inherent risks. Your house may lose value or you may lose your job. The increase in income you expected may never materialize.
If you would rather put money into a stock portfolio or educate your kids - interest only home loans are that flexible. This only works if you fall into the categories mentioned above. Most often the money you save is never invested! It's just too tempting. If you can be careful about spending, your debt, and making good investments, your net-worth will be higher in the long run and this kind of loan may well pay off.
