An interest-only loan is one that gives you the option of paying just the interest or the interest and as much principal as you want in any given month during an initial period of time. Interest only loans can be 30-year fixed-rate mortgages or adjustable-rate mortgages. Quicken Loans offers home loans that are interest-only for the first three, five, seven or ten years.
If you choose to make the interest-only payment, your monthly payment will be lower than it would be with an interest and principal payment. Your interest rate may or may not be lower than a traditional mortgage, but you will have the option of flexible payments. Interest-only loans allow you to control your payment amount and your cash flow in any given month during the interest only period.
Who Is an Interest-Only Home Loan For?
There are good reasons to consider an interest only loan. For instance, it might make good financial sense. Here's how: On a traditional 30-year fixed-rate mortgage, roughly 70% of the payment goes toward interest during the first six or seven years of the loan. If your interest rate is low, then you've borrowed money at a good rate. Instead of paying down that low rate loan, you could take the extra money you'd have each month from making interest-only payments, and invest it in something that would bring you a higher rate of return. Or, you could pay down higher interest debt like credit cards. Depending on your loan amount, you could have access to thousands of dollars over the course of several years to invest or reduce high interest debt. That may be a wise financial move.
An interest-only home loan may also be a good option for people who expect to be in their homes for less than ten years. The average homeowner stays in their home between five and seven years. As mentioned before, mortgage payments are mostly interest for the first years of the loan. Many homeowners like the option of making interest-only payments and using the extra money as they please - save for college tuition, make home improvements.
Misconceptions About Interest-Only Loans
A common misconception is that if you're not paying down your loan's principal, you're not building equity in your home. Not necessarily true. Homes in the U.S. have been appreciating between 5 and 6% a year. Chances are that even if you're not paying down your principal, you're building equity in your home through appreciation.
You should also know that with any Quicken Loans interest-only home loan, there are no prepayment penalties ever. You can refinance anytime.
