Are you interested in buying a home, but want “more house” than you can presently afford? Many mortgage lenders use your current income to calculate what payments you can make, and therefore, the size of the loan they are willing to approve. But if you are at the start of your career, your income will likely increase as the years go by. So what can you do? Wait a few years until your paycheck matches your dream home? In the meantime, you’re probably paying rent–money that you could use to invest in your own home. Plus, interest rates may climb in the interim, meaning you’ll pay more in the long run.
Another option is to consider taking out an interest only home loan, which can increase your purchasing power while lowering your initial payments. An interest only home loan is unique, in that you are only paying the interest on your loan for a fixed amount of time. For example, for a 30 year loan, that period of time may be five years. For the first 60 months of the loan, you are merely paying off the interest at a fixed rate. This payment is much lower than that of a traditional mortgage.
After the 60 months go by, your payments will change–you will then start paying off the balance as well as the interest. Your interest will also switch from a fixed to an adjustable rate. However, your margin of adjustment will still be tied to your original interest rate–the one you established five years prior. This is an advantage if interest rates have gone up over time–your overall rate should still be lower.
Is An Interest Only Home Loan in Your Best Interest?
Another great thing about an interest only home loan is that you can start paying off the principal right away if you so choose. You can generally pay up to 20 percent of your balance over any 12 month period without risk of penalty. In short, you don’t have to dream about the house you really want–an interest only home loan can help you buy the home you want today, with lower starting payments