A loan in which only the interest is repaid throughout the course of the loan. The original amount is repaid at the end of the term of the loan, rolled over by the same bank, or refinanced by the owner. A loan is considered “interest only” if the monthly payment does not include any repayment of principal – the payment covers only the interest and the actual loan balance remains unchanged. This type of loan can be done on a fixed rate or ARM loan.
Interest only loans are usually set for a fixed term, such as ten years for mortgage loans, during which the loan amount remains the same. At the end of the term, the mortgage reverts to a conventional loan and the loan amount begins to decrease. The advantage to the borrower is that they will pay a lower amount during the term, thus making the deal easier to budget for. For someone who expects an increase in income during the fixed interest free period, it may be worth doing. Lenders are taking a higher risk on an interest only loan, thus the interest rate will be higher than conventional loans.
Borrowers who are able to qualify for a conventional loan may decide to take the interest free loan in order to fund a retirement account or pay for educational expenses first. Borrowers may be taking a bigger risk than they realize, as they are not building any equity and may be more susceptible to changes in local housing markets. Some borrowers with low credit scores, which render them unable to apply for conventional financing, may opt for an adjustable interest only loan.
The sudden increase in monthly loan payments if interest rates adjust upward, or at the end of the fixed term when the loan begins amortizing, may be impossible for many borrowers that are either overextended or did not plan ahead. These borrowers will be unable to refinance the loan on a home that has no equity, which may coincide with a downturn in the housing market, thus may have no recourse but to file for bankruptcy, let the home go into foreclosure, or both.
For smart buyers with good credit who have some money to invest, interest only may be a good way to get the home they want.
For more information on applying for an interest only loan, contact Meridian Mortgage at 317-968-9500 or contact us online.
Meridian Mortgage Solutions is a subsidiary of Endeavor Capital, LLC Licensed through the Indiana Department of Finance and Insurance. License #17519 & 17520, NMLS#222524
Endeavor Capital, LLC and its DBA's are not acting on behalf of or at the direction of HUD/FA or the Federal government.
Illinois Department of Finance and Professional Regulation, 100 West Randolph, 9th Floor, Chicago, IL 60601, 312-793-3000
Illinois - IL # MB.0006030
Tennessee - TN # 116624-101