How to Get the Best Interest Only Home Loan Rate
With most home loans, your monthly payment includes a part of the principle (the total amount borrowed) and interest on that principle. But some borrowers get an interest-Only Home loan, in which you pay only the interest of a loan, but none of the principle. You do not need to start paying on the principle until after the loan has ended.
These types of loans tend to be relatively short, typically no more than five years, and they often have a higher interest rate than the standard principal and interest loan.
What are the Benefits of an Interest-Only Home Loan?
Borrowers tend to get interest-only loans for two reasons.
The first reason is the most obvious. Because you only pay on interest with this type of loan, your payments are much smaller. Therefore, interest-only loans can be useful for those who have larger financial obligations, such as medical debt or other property debt, to settle before they’re ready to pay on the principle.
Second, they get interest-only loans because they allow them to purchase and hold a property more quickly. Instead of waiting until their financial situation allows them to pay on both principle and interest, people can get a loan and make their purchase now, and then pay on principle and interest when their financial situation improves.
What are the Drawbacks to an Interest-Only Home Loan?
Just because you’re not paying on the principle doesn’t mean that it’s not there. You’ll still need to pay that amount back and those interest payments don’t make it smaller. As a result, you’ll end up paying more in the long run than you would in a standard principle and interest loan.
Furthermore, payments on a principle and interest loan are larger than those on an interest-only loan. If you get accustomed to the lower payment, the larger one can come as quite a shock.
How to Get the Best Rate on an Interest-Only Home Loan
Like any other loan, your rate on an interest-only loan is determined by your credit score, your income flow, and the term.
To get a lower rate, you should make sure that you have as few debts as possible before your application, paying off at least half of what you owe on every credit card. Also, provide documented proof of a reliable flow of income, proving that you’ll be able to pay what you owe.
But the most important step involves the loan itself. The longer the term of a loan, the greater the risk to the lender, as you may not be able to pay it all back. The greater the risk, the higher the interest rate. Therefore, if you restrict your interest-only loan to a shorter term, you’ll get a better rate.