If you want a mortgage loan that has low monthly payments but still allows you to borrow a large amount, then an interest-only loan might be the best option. However, despite its advantages there are hazards to an interest-only mortgage loan, and you need to be sure you can cope with these problems before signing up. To help you decide whether an interest-only loan is right for you, here is some more information on the hazards and benefits of interest-only loans.
What are interest-only loans?
Interest-only loans are loans in which you only repay the interest each month on the loan. Throughout the loan term the capital amount remains untouched, which you pay back at the end of the term in a balloon payment. This can be great for saving you money each month in repayments.
Advantages of an interest-only loan
Interest-only loans are great for people who cannot currently afford a repayment mortgage because they have a low income, but know that their income will increase in future years. They can pay the low payments now, and then when their income increases they can either refinance or save up to pay the balloon payment. If you get an interest-only loan with overpayment features, then you can increase your payments on the interest each month as your wage goes up, and help to pay your mortgage off earlier.
Investment to pay off the balloon
In order to pay off the balloon payment, an interest-only loan is often accompanied by an investment package designed to grow in order to pay off the final payment. This could be in stocks or bonds or another form, but should be projected to mature enough to pay off the loan amount. If you are lucky, then the investment might grow enough to leave you in profit at the end.
Investment might not grow
However, far more likely than the investment growing more than the payment is that it will fall short. If this happens, you might be left unable to pay off your mortgage. You might be able to refinance, but if not you could lose your home. Also, if your income does not grow by the amount you thought it would, then not having paid off the capital before now will have cost you a lot of money in useless interest should you need to refinance.
Be sure you can afford the payment
An interest-only mortgage can be a great option if you know that you will be able to pay off the balloon payment in the future due to a cash injection, but you really need to be sure before taking on this burden. It might be better to get a lower repayment mortgage than getting an interest-only mortgage, or wait until you can afford the right repayment mortgage. However, if things go right for you then an interest-only mortgage could help you get the house you want and pay off your mortgage more quickly.