Home Equity Loans - Are They Right For You?
Copyright 2005 Dean Shainin The bills are out of control and you need a new car. “Maybe we can get a new carpet and paint the house”, you say to yourself. These are just a few reasons why home equity loans can seem like the solution to all your...
How Do Those No Fax Payday Loans Work?
The traditional forms of payday loans involve those small walk-in offices that you find in strip malls or smaller plazas; often they are not the friendliest looking place. They provide small term loans of a few hundred to possibly one thousand...
Instant loans - prompt response to unforeseen financial fiasco
Loan market is flooded with loan types that cater to specific needs of loan borrowers - car loans, education loans, mortgage, home loan etc. But what if a requirement of £250 springs up and you don't have the needful cash and neither can postpone...
Personal Debt Consolidation Loans: Isn't it time to stabilize your financial position.
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School Loans Suck
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Interest Only Home Loans
When choosing home loans home buyers are presented with a choice of borrowing formats. They can either select repayment home loans or interest only home loans. Repayment home loans involve the home owner making monthly repayments where the amount repaid includes the interest charged for that month AND a small percentage of the capital. Interest only home loans, as their name suggests, involves the home owner making repayments of the interest only each month. The home owner is then required to choose an investment vehicle to build up a lump sum that can be used to pay off the capital in one hit at the end of the home loan term.
Why choose interest only home loans?
Interest only home loans offer several advantages to the homeowner. The most obvious benefit of an interest only home loan is the fact that monthly repayments will be lower than on repayment home loans. This is because the home owner does not pay off any of the capital each month, leaving the home loans debt at exactly the same level at the end of the loan term as it was at the start.
To illustrate this advantage lets take home loans of £100,000 and set the repayment terms over 25 years at the current standard variable interest rate, which is typically 6.75%. For repayment home loans the borrower would be making interest & capital repayments of around £700 each month. On an interest only mortgage however the borrower would
only have to repay £562.50 in interest. That's a saving of £137.50 each month!
If you'd be struggling to meet the monthly costs of repayment home loans because of a low income, but figure that your income will go up in future years then taking out an interest only home loan could be ideal! Additionally, should you choose an interest only mortgage product where early repayment / overpayment of the interest is allowed, if only up to a certain percentage, then as your income builds you will actually increase your chances of paying off your mortgage early. One important point here though; if you do intend to aim for early home loan repayment you'll need to make sure that the investment vehicle you use to pay off the capital grows enough to meet the capital debt in time.
Other advantages of interest only home loans are tied up in the investment vehicle itself. This is because, being an investment, it may grow more strongly than anticipated and leave you with a lump sum even after the capital on the home loan is repaid. However, it is only right to mention that being an investment it could under perform too, and so is no guarantee that it will grow sufficiently to pay off the capital owing on a borrower's home loans. About the Author