When Are Interest-Only Loans A Potentially Good Idea?

When are interest-only loans a potentially good idea? An interest-only loan can pay off if you are thinking of buying a house in an area with high appreciation. How do you know if an interest-only loan is...

How do you know if an interest-only loan is right for you? Anne Reed of Acceptance Mortgage in Sparta, New Jersey is a loan expert.

"Interest-only loans are a good idea for many. First and foremost, they reduce the customer's monthly payments. This allows the client to qualify for a larger mortgage and probably a nicer/larger home. This home may be in better condition or a better neighborhood maybe with better schools. Or maybe they are a young couple who are just starting out," Reed said. "With starter homes in many places starting at a quarter of a million dollars, how are they to qualify? Since lenders qualify based off of the interest only payments, it helps many get started as homeowners. Later when the careers are paying more they will be in the fully amortized part of the mortgage, or they can choose to refinance."

Another scenario where an interest-only loan could be right for you is if you're looking to put your money towards other investments that will help you increase your cash flow for the future.

"For some clients choosing the interest only mortgage, it allows them to keep more money for investments, putting kids through college or just saving for the future," Reed said. "The extra money being saved could also be used to pay down high rate credit cards."

By using an interest-only loan you can put the extra cash toward higher interest debts. By the time they are paid off you might be ready to have your loan be fully amortized.

Your occupation may make an interest-only loan a good idea as well.

"Interest only loans also suit the needs of seasonal workers like landscapers. This client type makes more money in summer than in winter. The client can take the extra money in the summer and apply it to principal and then in the winter they only have to meet the interest payment," Reed said. "The same would apply to borrower's who receive bonuses or commissions. The cash in hand from bonuses or such can be applied directly to principal while keeping their monthly expenses to a minimum."

If your income falls into the realm of feast or famine, an interest-only loan can certainly come in handy during the lean times. If you are expecting to make a great deal more money in the near future an interest-only loan could be an excellent choice for you.

An interest-only loan can pay off if you are thinking of buying a house in an area with high appreciation. With an interest-only loan you can afford to purchase a home that might be a bit out of reach but will appreciate in value more quickly than a home that is located in a cheaper area.

"After a period of time, they may actually have more equity because the appreciation value is higher than if they had bought in a lesser neighborhood," Reed said. "With market values appreciating so much, it could forcibly happen."

If you're worried about deducting your mortgage interest on your tax return, the interest-only loan will give you the same deduction as a fully amortized loan. Since only interest is allowed to be deducted your entire payments for the year will be a deductible.

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