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Interest Only Loans
Do You Need an Interest Only Loan?
An interest only loan is a type of loan, usually for a home or business, that allows you to make monthly payments on just the interest. Here, you aren’t required to pay back any of your principle loan, at least not right away. An interest only loan gives you the opportunity to control how much you pay each month; you will often make payments on interest only. This usually results in a lower monthly payment. Interest only loans can be based on a fixed rate or an adjustable rate. After an agreed upon length of time, you will start making payments not only on your interest, but on your principle loan as well.
Is an Interest Only Loan Right for Me?
Deciding if an interest only loan is right for you requires a thorough understanding of what you want out of owning. If you have a reliable, steady income and are able to use money more freely, then an interest only loan could be right for you. It’s important to look at how long you plan on owning your home or business. If you plan on owning for more than thirty years, then you may want to consider other types of loans. Interest only loans can be good for short-term owning because the low monthly payments can last for only ten years, allowing you to pay off a significant portion of your interest while earning income.
Drawbacks of Interest Only Loans
There are certain disadvantages of interest only loans. Because they offer such low monthly payments for many years, after a certain amount of time, you will be expected to pay back your principle loan. This is where large monthly payments come in, and it’s important to see that while you may be saving money in the beginning, you could find yourself owing much more later on. Interest only loans are attractive to many first-time buyers because buyers have the option to pay less each month. But you should be aware that once you’ve stopped making payments on interest only, payments on your principle will kick in, which are much higher. You want to avoid making large payments too fast if you have an interest only loan because you may end up having to pay heftily when you can’t afford it.
What to Consider Before Applying
Before you apply or try to obtain an interest only loan, you should consider how long you plan on owning your home or business and how steady your income is. It’s easy to opt for an interest only loan because your payments on interest only are lower than those on your principle. But you should also be aware of the interest rate before applying for a home only loan. If your interest rate is fixed and low, then you’ll be able to pay off the interest quickly, if you have a source income. This leaves you with a large principle loan to pay off after time, but with a non-adjustable interest rate.