Being able to understand the fundamental principles of a loan, particularly interest only loans, can save you stress and ease the process of borrowing. Interest-only loans allow for payment of loan interest before the principal amount. Most mortgages are interest-only enabling lenders to earn profits quickly and in turn offer borrowers low interest rates. A few years ago, homeowners in their thousands took advantage of best rates for interest-only loans as values for real estate skyrocketed.
Before seeking best rates for interest-only loans, consumers need to ensure their financial base is solid enough to handle monthly repayment of interests and principal amounts. In the paragraphs below, we explore the two types of interest-only loans; the mortgage and commercial interest-only loans. While mortgage interest-only loans are ideal for homeowners, commercial interest-only loans are suitable for businesses seeking expansion or initiating a new business project.
Basics of Interest-only loans
When looking for the best rates for interest-only loans, you need to know that interest is basically the cost of borrowing money and is usually stated as a percentage. It is important to note that for an interest-only mortgage, monthly repayment made in the initial five years essentially goes to offset the loan interest hence there is no reduction on the principle amount borrowed. In several cases, the first interest-only payments are lesser than payments on the principal amount. This makes it possible for a borrower who intends to earn more profit with time to acquire a bigger loan.
How Interest-only loans work
To understand how best rate for interest-only loans work, we shall evaluate the mortgage for residential houses. Many interest-only repayments are worked around an amortization period of 30 years. For each loan, there is a precise introductory phase of 3 to 15 years to facilitate the required payment of the moan’s portion only on a monthly basis. Upon completion of this phase, full amortization of the loan over the remaining period of the loan is done. In other words, the 30 year repayment duration is pushed to 25 years resulting to an increase in monthly repayment requirement.
When used well, there are many good qualities that come with best rates for interest-only loans as it is with other financial tools. In the past five years, it was feasible to access interest-only mortgages without any money in the pocket. . Five years ago it was possible to obtain an interest only mortgage with zero money out of pocket. If the value of homes dropped, it is obvious that home owners who went for such mortgages would be in bad shape. If you bring in the risk associated with adjustable rates, you have a disaster in the making. However, should you be having a considerable quantity of equity or down payment ; or you have a plan to be in your home for less than 10 years and an interest-only loan appeals to you because of the existing environment in terms of interest rate, then you may want to explore the opportunity.
This is because the interest on your mortgage is heavily loaded to the first half of your loan repayment period as it happens is the custom during amortization of mortgages over a 30 year period. This means you will be paying unequal monthly amounts towards your loan interest during your mortgage’s initial stages. If you possess money management competencies or worked with a financial expert who has a good record of out producing the interest percentage associated with your mortgage, you may be able to use the amount that you would otherwise be paying towards your principal amount to pay off more interest debt responsibilities or in alternative investment plans. In addition, you may choose to reduce your principal amount by making payments at your own convenience.
Commercial interest-only loans
Interest-only loans for commercial purposes are an efficient way to ensure your business keeps growing. There are various ways through which you can ensure your finances gives you the greatest return on the investment you put. Remember, don’t necessarily have to say yes to the initial offer a bank brings your way with respect to a loan or business finances. There are not only numerous types of banks providing funds for projects related to business, there are also other monetary institutions providing monetary solutions and outstanding services to medium and small businesses. Better still, it may pay off approaching independent financial companies for business financing because many banks continue to tighten their programs to get out of recession.
Commercial loan is a loan given to a business with an aim of aiding its business operations. This loan is also called working capital in business terms. There are many businesses that seeking commercial interest-only loans to either expand current business functions or to facilitate initiation of new business projects. However, mortgage lenders do not commit themselves to interest-only loans for a long time when it comes to development of property or investments in real estate.
In real estate investment and property development though, a mortgage lender will not commit to an interest free loan for a lengthy period of time. They instead avail commercial interest-only loans to businesses during the renovation phase if a building already exists or during construction phase. Commercial interest-only loans enable you to pay reduced rates monthly in the initial months as well as the other years in which the loan’s principal amount is repaid. The loan interest is paid for a predetermined period of time hence allowing borrowers to have a reduced initial program for payment that benefits businesses during their inception stage. This eases the financial burden for borrowers as they wait for return on their investments.
Under the right circumstances, interest-only loans are the best fit for the right borrower. Before deciding on financing a home, it is advisable to always consult a licensed and experienced professional mortgage. Only educated consumers and money managers who are confident should consider best rates for interest-only loans alternative; they can be costly in the long-run.