Interest only loans – What should you consider before applying for one?


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The interest only loans are the ones obtaining which you pay just the interest alone for a specified period. In a conventional loan, you cover both the interest and a part of the principal in your monthly payments. When you are not required to pay towards the principal, your monthly payments are lowered in this option. There are so many reasons for a borrower to lower the monthly repayment amount. You can buy a costlier house with lower monthly payments. You can spend the amount saved on monthly payments for some other inevitable purpose. Another important reason is that your stress due to monthly payments is much reduced.

Benefits of interest only loans

You can customize your own amortization schedule as well. When your financial situation gets better, you can pay more towards the loan and think of settling the loan earlier than agreed. When you use the option wisely, it can be highly beneficial to you. When your monthly income is lower, you can pay just as much as you can afford and pay more when you have additional funds. However, sometime or the other you need to make larger payments towards the personal loans for bad credit if you have been paying only towards the interest for a fixed period.

If you make additional payments towards the principal of the interest only loan, you are required to pay lesser towards the interest in the subsequent months as the principal of the loan is reduced. There are certain drawbacks that need to be considered before deciding on the offer. The main factor is that you are not able to build any equity in the property if you have been paying only towards the interest of the loan. Since you are not able to build wealth, you are forced to write a check when you need to sell the house if the value of the house gets depreciated for some reason or the other.

It can pose a problem when you have the necessity to apply for a second mortgage. When the loan term is about to expire, you will have to spare a huge amount to settle the mortgage. By paying only the interest, you are really servicing the debt as the principal of the loan does not get reduced. At some point or the other you need to pay back the loan and so you might be forced to sell the house or opt for refinancing. Without equity either of these two options cannot be beneficial to you at

Before applying for the option of interest only loan, you have to compare the payments towards this option and the payments towards an amortizing loan. With an online calculator provided by most of the lenders’ websites, you can make the comparison. The interest only loans might prove advantageous for your situation especially if you are yet to get settled in a job with good income. However, you should understand the disadvantages of the offer before committing to one. If you are going to apply for the loan for the sake of buying an expensive house, you need to think twice before deciding on the offer.

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