Interest Only Loans: Who Are Candidates?

If you are good with money and investing then an interest only loan may be good for you. These types of loans are also good for people who are good money managers. Self employed business people who are looking for ways to increase their cash flow may want to consider an interest only loan. When things are slow and they don't have as much business coming they will be able to pay an interest only payment which is substantially smaller than a loan payment which is fully amortized over the life of the loan.

Investing

If you are paying an interest only loan you can take the other portion which is designed for the principal balance, if the loan was fully amortized and invest it. The idea behind the investing is to see if you can invest the money at a rate that's higher than the mortgage rate because this increases your rate of return.

Managing debt

Another possibly is taking the extra money saved and apply it towards credit card debts which probably have a higher rate of interest. Some credit card companies are looking at raising interest rates to improve their profitability because of the massive amounts of credit card debt that they have written off as noncollectable and as a bad debt. An interest only loan gives you're the opportunity to free yourself of this debt.

Commission

If you receive commission you may want an interest only loan because you will be able to pay a lower payment while you are waiting for your commission checks. Once your larger commission check arrives you will be able to apply a large payment to your principal balance and reduce it substantially.

Career Advancement

Early on in your career you may want to take on an interest only loan because chances are you will be promoted later on down the line and your income will increase. Once the interest only period is over, which is normally 5 to 7 years your remaining will amortize over the rest of the term remaining and your payment will increase substantially.

Risk

There is always the risk that the value of your home may decrease or you could lose your job. If this happens you will not be able to refinance your loan and receive a more comfortable payment.

Interest rate
With an interest only loan you may not receive a lower rate of interest. In fact your rate could be higher because you are viewed as more of a risk.