Interest-Only Loans

Lenders and brokers all over the place urge borrowers to take out interest-only loans. However, they’re not the best option for all potential borrowers.

Interest-only loans tend to work best for the people who:

  • Work on infrequent commissions or bonuses
  • Are “just starting out” and/or are working towards a promotion, and expect to be making a much bigger salary within a few years
  • Will invest the savings on the difference between an interest-only mortgage and an amortizing mortgage on the assumption that this will make money

If you’re on a regular salary or wage schedule and have a moderate-size home loan, then an interest-only loan probably isn’t for you, especially if you don’t have a strategy for investing the savings.

An interest-only mortgage loan means that you pay only the interest on the mortgage in monthly payments for a fixed term, usually about five to seven years. Once that term has ended, you either refinance, pay the balance in a lump sum, or start paying off the principal. In this last option, the payment amounts soar.

Business owners with unpredictable incomes might also benefit from interest-only loans. Financial advisers point out that interest-only loans are a great way to maximize cash flow for operating costs. Interest-only loans are also a popular option among young people, newly entered into the workforce, who expect to climb the corporate ladder fast—and watch their bank accounts grow proportionally. These loans, according to financial experts on the pro-interest-only-loans side, are a great way to capitalize on buying power. As well, interest only loans can help those who need a home to entertain prospective clients and business contacts in in order to further their careers.

Opponents to interest-only loans warn of “traps” borrowers put themselves at risk for. For example, what if an entry-level executive hopeful starts out on a promising trap in a large company… and gets downsized a year later? Or, what if a buyer jumps in with an interest-only mortgage on a home, only to have the property value decrease and end up forced to sell for less than he or she paid?

As with any loan, you must first conduct careful research and weigh all the pros and cons before deciding to sign up for an interest-only loan.