The News on Interest Rate Only Home Loans
When you pay your monthly home loan payment, you may have noticed that a part of it (however small) decreases the loan and the rest of it pays the interest. That?s the way a normal home loan works. Lenders have now formulated a new type of mortgage titled interest only.
The home owner can choose how much to pay each month, as long as he pays an enough to will meet the interest, and does not change the principal. Of course, most lenders will allow you to pay more than the minimum interest payment each time you want, but that defeats the purpose of the loan, which is to keep the mortgage payment as low as possible.
This loan had a place when home prices were skyrocketing, since even if you never paid down some of your mortgage, you would still have plenty of equity because of the house?s increased value. Normally, equity in a property is gained by a combination of paying off the loan value and rising home values.
Today?s falling home prices means that borrowers can no longer depend on an automatic increase in their house?s value. The only reason that one would want to have an interest only loan is to keep the monthly payment as low as possible. Today, it would really only work if it were used as a stop gap device.
Let us say there is a situation where one partner is not working or only working part time while he completes school. Theoretically, once the other partner finishes school and starts a job, the home loan payments can be increased to start to reduce the loan.
Another valid situation might be if the primary income owner had an erratic earning pattern, in which he had little to no income for a period and then a windfall income. An example of this could be someone who did project work and was only paid at the end of each project. Keeping payments low in the months when income was low and then paying into equity when the windfall came would make sense, as long as the discipline was there to make the additional payments.
But eventually, the borrower should be sure that those principle payments get caught up on. As mentioned, with ?old fashioned? mortgages, the loan was paid down eventually because part of the monthly mortgage went towards principal, so the owner had some equity even when the value of the house did not go up. However, if you always pick the interest only option, the mortgage principal will never be reduced, and the amount received by the sale of the home will not be enough to pay off the loan.
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