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Repaying Interest-Only Home Loans

It is a fact that the interest-only home loans are among the riskiest ones available in the market. Still, many people choose them because of the smaller interest-only payments which are made every month. If you opt for such a mortgage, you must have a precise plan for its repayment set into place. Compare the main repayment strategies which you can adopt and select the most suitable one for you.

You should have a clear idea of how interest-only home loans work in order to pick the right repayment strategy. Throughout the term of the loan, you will make only interest payments, which are smaller than the interest and principal payments made with traditional mortgages. At the end of the term, you will have to pay the principal amount in full. This is the challenging part.

Saving and Investing

While you pay only interest on your mortgage, you can set money aside during its term so that you can save enough for making the principal payment in the end. The problem with this strategy is that the interest rates on savings accounts and deposits are typically lower than those on home loans. That is why this option may not be cost-efficient. If you want to earn a higher return, you can build an investment portfolio in addition to using the traditional methods for saving. You have to take into account the higher risk, however.

Switching to a Standard Repayment Loan

This is the strategy used by most borrowers. You keep paying only interest while you have limited means. Once your income increases, you can switch to a standard mortgage repayment plan which enables you to pay a portion of the principal back every month. This is an effective strategy as long as you are certain that you will have sufficient disposable income to make the higher payments. You need to be certain that the new repayment structure will have favourable terms and conditions. Additionally, you have to be a disciplined borrower to ensure that you will qualify.

Re-Mortgaging

You can take out another mortgage at the end of the term of the first one in order to pay the principal. You can do this at any time during the term of the loan as well. This strategy can be highly beneficial if you are able to secure a lower interest rate on the new loan. This will work out if you have sufficiently high equity in the property and excellent credit record. You should be aware of the risks of using this tactic as well. You may get rejected for a new loan. If you get approved, you may be forced to accept less favourable repayment terms.

You should plan the repayment of the interest-only home loan extremely carefully.

For more help with your mortgage, feel free to contact us!

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