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Interest Only Home Loans Increase in Popularity

If you have your eye on a house that is just out of your price range when it comes to the monthly payments, you may be in luck. Recent advances in the mortgage industry have created home loans that cater to people who can't afford a traditional 30-year loan on their chosen house. Interest only home loans have taken the real estate industry by storm, and have allowed people to afford bigger and better homes than they have ever dreamed of owning.

The details of interest only mortgages are fairly universal among banks and mortgage companies, in that the borrower only pays the interest on the mortgage each months for a fixed term, usually five to seven years. At the end of that time period, the borrow then either starts paying higher payments which are partially applied to the principal for the first time, pays off the mortgage in its entirety, or refinances the balance of the loan.

Although not for everyone, interest only home loans make sense for a select group of individuals. A person who makes most of their money in the form of infrequent bonuses or commissions is a perfect candidate for this program. For someone who makes only a modest salary but gets a huge yearly or twice yearly bonus, such as a company executive, this type of exotic loan is a good fit. The salary can be used to finance the interest payments throughout the year, and then the bonuses can be partially applied to the principal in separate payments to build equity in the house. The homeowner just has to be disciplined enough to actually apply the bonus money to the mortgage instead of earmarking it for other things. Otherwise, after five or seven years, the balance of the loan will be exactly what it was at the beginning.

Likewise, a person who expects to earn substantially more in the coming years would benefit from an interest only home loan as well. If an expected salary increase is in one's future, why should that person wait until then to enjoy the house of his dreams? With this type of loan, the homeowner can enjoy the more expensive home now, with the anticipation of being able to afford the higher payments when it comes time to renew the loan.

Finally, a person who chooses to invest the money that is saved from an interest only home loan can stand to benefit from this type of arrangement. Money that is applied to the principle of a mortgage that is set at 6 ½ percent is the exact same thing as if that person had invested the funds in a bond that pays the same percentage. So, if one can guarantee a return of even greater than that, say at 8 percent, then an interest only home loan is a good idea, because the homeowner will enjoy a return of 1 ½ percent greater on the funds that would have gone to the principal of the loan in a traditional mortgage.

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