If you have a steady job, a family, and like the idea of building equity in your home, an interest only home loan is not very ideal for you.
An interest only home loan does not pay off the principal of a loan as you go, so there is no equity built into your home as you pay. What this means is that if you are suddenly in need of large sums of money you couldn't get a home equity loan or sell your home for a profit because you have not put anything into the home. Many families consider their home a safety net, because if they get into trouble or there is a family emergency they can borrow against the home or even sell it for liquid money. If you have an interest only home loan you lose the safety net.
One serious disadvantage to the interest only home loan is that it has a substantially higher interest rate than other loan programs. Many lenders tell borrowers that the interest rate is the same or lower, but over time the interest rate is higher than a traditional loan program because it is riskier for the lender to extend an interest only home loan to a borrower.
Another thing that borrowers must consider is that the interest rate of an interest only home loan may increase substantially after the interest free period. This might not be an issue if you are able to make the payments, but the change in payments can often render the homeowner unable to pay, so that they end up defaulting on their loan. Investing the money during the interest free period is a great idea, but a good deal of people simply fail to do this, or they invest too aggressively and end up losing money. There is a very find line here, making the interest only home loan very costly and less than ideal for some people.
While an interest free loan may work for some, it can spell disaster for others. The most important part of the loan process is research and finding out what type of loan is best for you.
An interest only home loan does not pay off the principal of a loan as you go, so there is no equity built into your home as you pay. What this means is that if you are suddenly in need of large sums of money you couldn't get a home equity loan or sell your home for a profit because you have not put anything into the home. Many families consider their home a safety net, because if they get into trouble or there is a family emergency they can borrow against the home or even sell it for liquid money. If you have an interest only home loan you lose the safety net.
One serious disadvantage to the interest only home loan is that it has a substantially higher interest rate than other loan programs. Many lenders tell borrowers that the interest rate is the same or lower, but over time the interest rate is higher than a traditional loan program because it is riskier for the lender to extend an interest only home loan to a borrower.
Another thing that borrowers must consider is that the interest rate of an interest only home loan may increase substantially after the interest free period. This might not be an issue if you are able to make the payments, but the change in payments can often render the homeowner unable to pay, so that they end up defaulting on their loan. Investing the money during the interest free period is a great idea, but a good deal of people simply fail to do this, or they invest too aggressively and end up losing money. There is a very find line here, making the interest only home loan very costly and less than ideal for some people.
While an interest free loan may work for some, it can spell disaster for others. The most important part of the loan process is research and finding out what type of loan is best for you.
