First Time Home Buyer – Interest-only Loan
There are several types of first-time home buyer loans that you can obtain to buy your first home. But it seems that one type of loan is getting all the press and attention these days, and that is the interest-only loan. But how does it work, and what are the risks? The short answer is, it works! If you have at least an NPCs credit score, you can take out an interest-only loan. But it doesn’t work for everyone. Here’s why.
What is an Interest-only Loan?
An interest-only loan is a loan that has a low monthly payment because you are paying only the interest on the loan. In other words, you are only paying the interest on the loan, as well as the principal balance of the loan, throughout the interest-only period. Why would someone want this kind of loan? Well, it’s quite simple. The person who wants this kind of loan has lost a job or if they are renting, just doesn’t have the money to get into a house. They are busy paying the bills and are willing to put up with a low payment, because they know (or should know) that they will be able to catch up on the loan. But what about the person who already has a home and a solid job? Should they take out an interest-only loan, then pray hard that the house doesn’t appreciate so fast that they’re left holding the bag for a house worth less than the loan? Great question. If you are a wise consumer, then you should never take out an interest-only loan.
Why do People get an Interest-only Loan?
We understand your concern about the interest-only loan. That said, we feel your dilemma is logical. There’s a good reason for it: Most interest-only loans are short-term loans. They are designed to give you flexibility with your monthly payment, but they don’t have to be up for long periods. Most of them have a three- to five-year interest-only period. Therefore, they aren’t meant, ideally, for the “sport” of homeownership.
Can You Really Make Money on Interest-Only Loans?
One of the big reasons that interest-only loans are popular is that they make homeownership more affordable. That said, many people take out these loans because they believe they will make money on the interest. Realize, however, that this is an investment, not a profitable one. You are paying interest on the money you don’t yet have. If the interest rate went down – and it sometimes does – you would lose money. If the interest went up (again, nowadays more and more often), you would also lose money. That is the big reason that interest-only loans are popular. They are an investment, and a risky one at that.
Enjoy Lower Monthly Payments
The other attraction of interest-only loans is the fact that they reduce the monthly payments that you have to make. There are other loans, such as the “cash you get back” loans, that improve this condition of low monthly payments. But interest-only loans do something that few other loans can do: reduce the amount of money you need to borrow to buy your home. That’s something to cash out for your retirement or to borrow to live on for yourself. It’s something that will help you achieve your dream of owning your own home, rather than paying the landlord’s mortgage, which is a thing that almost everybody has to do eventually.
You still have to save up, but this is an excellent way to do it.