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Though lenders tend to have tight qualifying guidelines for interest-only loans, there are still plenty of competitive offers out there. For investors, an interest-only mortgage can maximize returns and reduce payments in the short term. For home buyers, they can provide some breathing room early in the loan — though it’ll cost more in the long run.
An interest-only mortgage only requires that you make payments on the interest for the first several years. After this period — typically after five to 10 years — you’re required to pay both the principal and interest.
While you’re making interest-only payments, your monthly mortgage payment is lower, but you’re not reducing the principal balance. After the initial interest-only period is up, payments increase and include payments to the principal. When that happens, some homeowners choose to refinance for more favorable terms.
Qualifying for an interest-only mortgage isn’t as easy as it was before the housing crisis — and requirements vary by lender — but your chances may increase if you:
If you’re buying a house as an investment, you might use interest-only loans because interest payments on an investment mortgage are tax deductible. Investors choose interest-only loans to minimize their monthly payments while maximizing cash flow and tax effectiveness. The risk with this strategy is that if property prices fall, you can end up in negative equity.
Interest-only mortgages might not be the best option if you’re planning on living in your new home as a primary residence. For starters, banks are typically hesitant to approve interest-only loans for owner-occupiers. The reasoning is that if you can’t afford to make principal and interest payments, you’re likely trying to borrow more than you can afford.
One of the main dangers of owner-occupiers using an interest-only home loan is that the payments can rise dramatically when the loan reverts to principal and interest.
However, an interest-only mortgage could be a good option for first-time home buyers who plan on moving or refinancing before the interest-only period ends. It’s also a good option if your income fluctuates — you can always pay more when you can.
There’s no one best interest-only mortgage, but there are different ways to find out if a home loan is the right one for you. Compare interest-only mortgages on:
Before diving into an interest-only loan, make sure the financial benefits outweigh the risks. Also be aware of your alternative options and whether or not they make sense for your situation.
Though they could be a solid choice for many borrowers, interest-only loans are not without their risks and potential pitfalls. Save yourself from paying too much by comparing mortgages to find the one that’s right for you.
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