An interest-only loan is one that gives you the option of paying just the interest or the interest and as much principal as you want. On a traditional 30-year fixed-rate mortgage, roughly 70% of the payment goes toward interest during the first six or seven years of the loan.
You could take the extra money youd have each month from making interest-only payments, and invest it in something that would bring you a higher rate of return or pay down higher interest debt like credit cards.
First time home buyers often like interest only loans, because it will allow them the flexibility of a low payment when getting their first home. You may pay more than the interst only, the extra amount will go towards the prinicple of the loan.
Interest-only loans make sense for a lot of people but do be careful and consider your own personal situation before making your choice. Remember that the balance due on your mortgage will not decrease over time. If real estate prices continue to rise, you will build equity in your property via those higher market prices. If prices remain level, you build no equity. If prices actually fall, you are left with a mortgage balance greater than the value of your home and will have to come up with the difference if you decide to sell.
Interest Only loans recast monthly, which means that if the balance is paid down substantially, the payment next month will be based off the lowered principal. This can be a vary handy tool for individuals who work off of commission and/or recieve large bonuses and want to lower their monthly payments. Large principal paydowns on regular amortized loans effect will shorten the term of your loan, but they will not lower your payments.
Interest only loans offer you greater cashflow.
Many of the available Home Equity Line of Credit or HELOCs are Interest Only for all or part of their term.
Remember, mortgage interest is tax deductable. If you pay towards your principle, that portion of your payment is not tax deductable.
Intrest only loans are offered so that if equity exsists in a property and future appreciation is expected the buyer has the ability to capitalize on the expected equity.
