An interest-only loan is a loan in which, for a set term, the borrower pays only the interest on the principal balance, with the principal balance unchanged.
How interest-only loans work:
The interest-only loan option runs for a set period of time, typically five to 10 years. Borrowers pay only the interest portion of the loan for this set period of time. At the end of this term, the full amount becomes payable.
Benefits of an interest-only loan:
Payments are lower than they would be with a traditional amortizing loan.
It allows you to buy a more expensive home than you would be able to afford. You can pay your house off much faster than with a conventional loan, because you are making lower payments for a number of years, following which you become liable for the full amount.
It allows you to free up money. The lower payments allow you to choose how and where you put your money. You can put your money towards paying for education costs or for various other investments.
It helps you keep costs low because it gives you an alternative to paying rent. You have the benefit of avoiding rental costs while getting the chance to own property.
Getting an interest-only loan is usually a good option when you have irregular income. You can benefit from paying the lower amounts initially if your income isn’t consistent.
While there are numerous benefits of getting an interest-only loan, there are also drawbacks.
What are the cons?
- You don’t build equity on your home.
- If your home loses value after you buy, it’s possible that you’ll owe more on the home than you can sell it for.
- You’re going to have to pay the loan off some day.
When you are looking to invest in your own property, make sure that you do the necessary research and weigh all your options.