The real estate investor and the interest only loan are a perfect pairing. The real estate investor looking to retain an investment for the short term can really benefit from the lowered investment of the principal payment. Especially in situation where the investor is improving the property and the value is certain to increase. This particular borrower fully understands the risks involved in an interest only loan, and has spent the time needed to determine if the product is right for his investment needs. The real estate investor is a business person, not a consumer borrowing to pay for a place to live. The short-term real estate investor or developer wants to keep his or her expenditures at a minimum during this investment period, saving as much of the expendable cash as possible for the actual renovation or preparation for sale of the property itself. The less money spent on mortgage payments, or in the investor's eyes, investment expense, the more money there is to actively and aggressively pursue potential buyers and increase the value of the property. This is good business, and good business is based on sound business decisions. It is here that every consumer needs to stop and reevaluate their borrowing situation against that of the investor. A real estate investor is a business person. Their livelihood depends on their knowledge of the product they market, in this case real estate. Normally, a business person is not going to take a risk with their personal investments that the will take with a business investment. Why? Because the home they share with their family is much more important than a business deal, most are not willing to risk losing their home. A risky investment for the consumer when speaking in terms of their home is not a good move. Taking the safe bet is a much smarter move on the part of the consumer, even if the interest rate is a little more, and the house is a little smaller.
When getting a loan you first need to get information to help you navigate the sea of options and select the right product for your needs. At first glance, an interest only loan, or IO, would seem to be the ideal low interest loan as for a period of five or ten years, you pay nothing but interest costs (which, on a low interest loan, can be almost nothing in comparison with traditional mortgages). Interest-only loans are not a type of mortgage. Interest-only is an option that can be attached to any type of mortgage. Lenders might charge a higher rate for a loan with an interest-only option, because the risk of default is a little higher on loans that amortize more slowly.
These low interest costs lower your payments making it possible for you to purchase a more expensive house or piece of real estate than what you would otherwise been able to feasibly afford and manage to repay.
Is an Interest-Only loan worth the risks? Consider the mortgage payment; traditional mortgage payments are applied first to the interest and then to the principal balance allowing a consumer over time to pay less interest and apply more of their payment to the outstanding balance owed on the mortgage. This is a snowball effect that, especially with fixed rate mortgages, pays off your home in slow but steady segments with no surprises, fees or additional expenses.
In comparison and interest only loan payment is applied only to interest for the first five to ten years. The increasing amount applied to the principal balance to pay the balanced owed is missing. This type of loan leads to a potential short term gain (as you have smaller payments but a long term loss. With an interest-only loan you have just delayed the inevitable repayment of a mortgage you most likely could not afford for 5 to 10 years spreading out a 25 year mortgage to a 30 to 35 year mortgage.
This is bad news for most homeowners, even ones with low interest rates is that after that grace period, the monthly payment jumps significantly and leaves many homeowners in a lurch and on their way to foreclosure. For most consumers the interest only loan is not for them but only knowledge of your personal circumstances as well as the details of the interest only loan you are consider will let you know if this loan is right for you. Please see below for more information on Low Interest Loans.
Both Katie George & Charley Huang are contributors for EditorialToday. The above articles have been edited for relevancy and timeliness. All write-ups, reviews, tips and guides published by EditorialToday.com and its partners or affiliates are for informational purposes only. They should not be used for any legal or any other type of advice. We do not endorse any author, contributor, writer or article posted by our team.