Today’s talk about interest rates is mostly about how low they have gone. Although interest rates are beginning to go up.
An interest-only mortgage, however, is a different story.
Homeowners with an interest-only mortgage do not pay toward the principal balance on their loan over a period of time. Interest-only loans are also offered on fixed-rate and adjustable-rate terms, similar to traditional loan programs.
At the close of the interest-only portion of the loan program, borrowers will begin to pay a different amount. Since the loan is now fully amortized, monthly payments will go up.
There’s an inverse relationship between the interest-only portion of the loan and what comes after. The longer the borrower pays interest only, the bigger the amortized loan payment will be.
Another consideration is home equity. When a borrower is in the interest-only phase of repayment, the homeowner will not accumulate equity. However, an interest-only loan can lead to other positive outcomes.
When a borrower is approved for an interest-only loan, the qualification threshold is a tad lower since the financial burden does not initially include principal repayment. Many borrowers will decide to refinance before the interest-only term ends, anyway. So, they can lease a dream home now while also investing excess income toward something else. In addition, they will be able to benefit from tax advantages and appreciation that come with homeownership.
Here’s some additional information on the advantages of an interest-only loan you should know about before charting your path toward homeownership.
Since interest-only borrowers need not focus on the principal balance for some time, they can turn their attention on other financial endeavors that would not otherwise be possible.
Maybe you want to finish graduate school or tap the entrepreneur within you to make a big move. You can take this period of interest-only payments to plan for tomorrow, when your income will be even bigger than it is currently.
Most homeowners enjoy the tax benefits that result from paying taxes and interest.
Mortgage interest on home loans up to $1 million is tax deductible. For this reason, an interest-only loan is desirable given the potential tax benefits. This is especially true for higher-income earners who are in higher tax bracket.
Great home affordability
With increasing home prices, borrowers welcome the opportunity to increase their buying power. An interest-only loan will do just that.
Whether you refinance in the future or plan on making a larger salary that can easily pay for the amortized mortgage payment, an interest-only loan program gives you flexibility to achieve your short- and long-term goals of owning the home of your dreams.
Like so many during the pandemic, you might have branched out to earn new income. If so, then an interest-only loan can support your goals.
With the extra financial wiggle room, you can pull the trigger on new investments or new retirement strategies that can transform your portfolio and set you up for new successes for many years to come.
Just because you’re in the interest-only phase of the loan does not mean you cannot chip away at the principal amount.
With an interest-only loan, it’s possible to make extra payments that lower both your principal and monthly interest payments. This win-win repayment strategy can come in handy if you have variable income.
Consult with your tax advisor.