The News on Interest Rate Only Home Loans
When you make your monthly home loan payment, part of it goes to pay the lender its interest, and part of it is used to pay down the loan. At least most home loans work this way. Some banks have now introduced a new kind of loan to attract more customers by keeping the monthly payment as low as possible by only paying the interest.
Basically the borrower can pay what he wants, as long as he covers the minimum of the interest payment. Of course, most lenders will let you pay more than the minimum interest payment any time you want, but that defeats the purpose of the loan, which is to keep the mortgage payment as low as possible.
The concept was believed to be valid since rising real estate prices guaranteed an increase in the value of the house. It used to be that homeowners accrued equity by paying off some of the loan, and by the added value of the house.
Today?s falling home prices means that homeowners can no longer depend on an automatic increase in their home value. There are cases where interest only loans are a good idea. Today, it would really only work if it were used as a stop gap device.
One example may be when a two income couple temporarily only has one income, for instance if one of them went back to school. The assumption is that he will be in a position to pay more for mortgage once school is finished and therefore they can make higher payments.
Or suppose a home owner has a erratic type of income, in that he earns very little for a while and then receives a large sum. An example of this could be someone who performed project work and was only paid at the completion of each project. It would be in his best interest to maintain his mortgage payments low during the periods of no income and raise them when the large income was received.
But eventually, the homeowner should make sure that those principle payments get caught up on. If you are paying off the principal a little at a time each month, when it comes time to sell the home, you earned some equity in it, even if home prices have not gone up. However, if you always pick the interest only option, the loan principal will never be reduced, and the amount received by the sale of the home will not be enough to pay down the loan. - 23211
Basically the borrower can pay what he wants, as long as he covers the minimum of the interest payment. Of course, most lenders will let you pay more than the minimum interest payment any time you want, but that defeats the purpose of the loan, which is to keep the mortgage payment as low as possible.
The concept was believed to be valid since rising real estate prices guaranteed an increase in the value of the house. It used to be that homeowners accrued equity by paying off some of the loan, and by the added value of the house.
Today?s falling home prices means that homeowners can no longer depend on an automatic increase in their home value. There are cases where interest only loans are a good idea. Today, it would really only work if it were used as a stop gap device.
One example may be when a two income couple temporarily only has one income, for instance if one of them went back to school. The assumption is that he will be in a position to pay more for mortgage once school is finished and therefore they can make higher payments.
Or suppose a home owner has a erratic type of income, in that he earns very little for a while and then receives a large sum. An example of this could be someone who performed project work and was only paid at the completion of each project. It would be in his best interest to maintain his mortgage payments low during the periods of no income and raise them when the large income was received.
But eventually, the homeowner should make sure that those principle payments get caught up on. If you are paying off the principal a little at a time each month, when it comes time to sell the home, you earned some equity in it, even if home prices have not gone up. However, if you always pick the interest only option, the loan principal will never be reduced, and the amount received by the sale of the home will not be enough to pay down the loan. - 23211
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