Although interest only loans have been around for years, they have not been extremely popular or touted as the best mortgage to acquire. Recently, however, a surge if interest in this type of mortgage has surfaced, especially with building associations.

What is an interest only loan? For a set period, which is predetermined, the borrower will make payments that only include the interest. After that period of time, the loan is recalculated and the payment, which now includes both principal and interest, is larger.

Lenders have discovered the ability to persuade homebuyers to consider homes with a larger price tag, simply because an interest only loan will allow them to make the mortgage payments. Individuals buying a home, who are more interested in having a large, fancy home to show off, rather than earning equity in a smaller home, are only too happy to oblige.

Society is full of pleasure seekers who have very little patience. Instant gratification has become the norm rather than the opposite. Unfortunately, not everyone has a wallet that can fulfill all of the desires of each individual person. An interest only loan can free up money that would normally be put towards the principal. Instead, the money can be spent on bigger cars, expensive furniture, or exciting vacations.

Quite often, the lender will benefit from this type of loan. Less chance exists for the homebuyer to default on the loan. The extra money that is now available since it is not included in a mortgage payment can be used to lower other areas of debt.

Disadvantages

• Homeowners will not build up any equity in the home during the time of an interest only loan, unless they make additional payments that go to the principal.
• Payments skyrocket and increase a great deal once the interest only period is over.
• If the homeowner has to relinquish the home due to hard times, little or no equity has built up during the interest only time.

Advantages

• Homeowners may be able to afford a more expensive home since the monthly payment is generally smaller with an interest only mortgage.
• Due to the smaller monthly payment, money can be spent on other items.
• Homeowners may be able to make all of their payments even in difficult times when money is less available.

In summary, an interest only loan is perfect for individuals who are interested in buying a property that is more expensive than their budget would otherwise allow. Equity can be built up during this time period only if additional payments are made. An interest only loan can free up cash for other purchases. All of these factors should be considered prior to committing to this type of loan.

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