An interest-only loan is a type of loan where the borrower only pays the interest on the loan for a set period of time. In the case of private lending, this is usually offered over 12 months, however in some cases it could be as much as two years.
One of the main advantages of an interest-only loan is that it can help borrowers with limited incomes qualify for a loan that they might not have been able to get. Since the borrowers are only paying the interest on the loan for the initial period, their monthly payments could be lower than if they were paying both the interest and principal. It’s definitely not a good long-term solution, but can offer quick relief for those in need.
While this isn’t ideal for everyone, certain situations lend themselves to this type of loan. For example, if a borrower’s mortgage was up for renewal, they may find the new rate and payment much higher than they budgeted for and are hesitant to lock in for an extended period of time. An interest-only loan could help keep monthly costs down, however, and more importantly it allows the borrower the option of staying in a short term, interest-only mortgage while keeping an eye on the current rate environment. Allowing for the option to opt out if rates begin to lower in the future.
While this is just one of many scenarios, it’s helpful to know that when times are tough, if you have equity in your home, you still have options! While this doesn’t reduce your total loan amount, it does help the borrower during short-term problems.
An interest-only loan can be a good option for some borrowers but it’s not right for everyone. Borrowers should carefully consider all the pros and cons before taking out one of these loans to make sure it’s the best decision for their individual situation. We recommend that borrowers seek the help of a mortgage broker to help navigate the transaction. A mortgage broker has years of experience and knows how to find solutions tailored specifically towards individual needs.
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