Interest Only Loan Programs

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Interest only loans allow you the borrower to qualify for a higher purchase price and save hundreds on your monthly payment.  With the real estate market reaching all time records in sales, this program is quickly becoming a commonly used loan.

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Interest Only Loan

How do interest only loans work?

Why would want to do a loan like this? There are several reasons, but here is the most common reason. 

You have to ask yourself how long do you plan to be in this home? If your answer is the rest of your life, this loan may not be right for you. Maybe a  30 year or a 15 year fixed rate loan is best. But,  if you are like most people, you know that you will be moving in 3-7 years and you need the lowest payment possible, and you are in an area that is growing rapidly, (where homes increase in value about 10% or more per year) then an  interest only loan could be right for you.

Lets use a real world example of how an interest only loan could work for you. We're going to use some round numbers to help you understand it easily.

• Lets say you purchase a home for $100,000
• Your loan rate is at 6%
• And you choose  a  5/1 ARM loan program, so for the first five years you are going to be paying interest only at 6%
• Lets say that the homes in the area appreciate an  average of 10% per year.
• Now, you have to remember, that you're not paying down any principal. So, in five years you will still owe $100,000 on the loan.
• But now your property is worth much more. You were increasing in equity 10% per year which equals  $10,000 per year. Times five years, you've made $50,000 in equity.
• So, when you go to sell your home, you've made $50,000 (but still owe $100,00 of the original loan), and you kept your monthly payments as low as possible.
• Truth be told, even on a conventional  loan, very little principal is paid down in first five years anyway.

As you can see these are great loans for people who are looking to stay in a home for a short period of time. But there can be one downfall to this type of loan program. If the market is to shift in the opposite direction, meaning you property gains little to no value, then when you go sell you may have to pay more out of pocket or just barely walk away and not owe anything. 

If you would like to learn more about interest only loans, please feel free to call us at 866.624.6873