The Pros and Cons of Interest Only Loans

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When you are looking at purchasing a house without a down payment, interest only loans look like a great deal. They are also common for people who are battling poor or no credit, but they are not always what meets the eye. Interest only loans have pros and cons so when you are looking at UK home and personal loans, take the following into consideration.

When It Is Good

While interest only loans definitely can lead to disaster, there are a couple times when they are great options. The first time is when you are planning to live in your home for the duration of the mortgage. Most mortgages are 30 years, and if you are not planning on moving, the amount you pay will be the same. It is important to note that this is also true if you are going to be working at a job that will have steady pay or are in a job field that is consistently growing.

Another time interest only loans are good to get is when you are a planning to flip a house. Your ideal game plan is to have the house for less than a year, so you will want to pay the minimum amount possible. With interest only loans, you will not have to pay a down payment and you will have lower monthly payments until you sell.

The Downsides

On the other hand, interest only loans have some pretty serious downsides. With these loans, you will not build any equity on your home. That is because your first ten years is only paying the interest. If there is a chance that you move or rent the house out, you will still owe the full value of your mortgage even if the house as lost value. This was not a problem when the housing market was on a bubble, but when that burst, it was quickly seen that homes were overvalued. This can cost you a great deal of money in the end.

In addition, when you only pay the interest for the first ten years, your mortgage will go up when the honeymoon years are over. You will save money at the beginning, but then you will be dividing up the remaining mortgage over a shorter period. This could have your monthly mortgage payment double after the first ten years. Unless you are planning to pocket the money you are saving during the interest only years, you will need to make sure you have the ability to pay the increased price.

In Conclusion

The decision to go with an interest only loan must be based on your individual needs. If you have a high paying job with a good savings account, plan on living in your home for the duration of the mortgage, or you are planning to flip the house, then getting the interest only loan is likely a great option. However, with income not being a guarantee, it can damage your financial future so make sure you weigh the pros and cons before getting the loan.

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