You plan to invest the savings on the difference between interest-only home loans and an amortizing mortgage (and you're confident that the investments will make money)Standard wage earners who take out moderate-size home loans, but who don't have a strategy for investing their savings, should probably not seek interest-only loans.
How Do Interest-Only Home Loans Work?
It can get very confusing if you don't have anyone to explain interest-only loans. These loans require you to pay only the monthly interest on the mortgage for a fixed term. After that term (usually five to seven years), you may choose to refinance, pay the balance in a lump sum, or start paying off the principal, in which case the payments jump skyward. Who Is the Typical Borrower of Interest-Only Home Loans?
The most common stereotype of a borrower of interest-only loans is an executive whose main income is from bonuses once or twice a year. Her income provides for the lowest possible monthly payments during lean months, yet allows paying off large amounts of principal when bonus time rolls around. Those with predictable incomes might also benefit from interest-only loans.
While historical precedent would seem to indicate that interest-only home loans target the wealthy, an increase in median home prices combined with a new generation of young career-oriented home buyers means that the appeal is widening. Interest-only home loans are now even available under $200k, meaning you can always reassess your options if you plan on making more money in the future.
The Benefits of Interest-Only Loans
The key to interest-only home loans is remembering to be frugal about going into debt. One big advantage is that you'll be able to reap the rewards of lower mortgage payments and bigger tax write-offs. In short, if you manage your debts as carefully as you manage your assets, it should be easy to put your money to work for you-instead of the other way around.