For the smart investor, an interest-only home loan has several advantages over the more standard principal and interest home loan. Those advantages include:
- Lower monthly payments
- More available cash
- The ability to use the extra cash for further investment
With a standard principal and interest property financed loan, you pay a certain amount of the loan as interest every month while also paying down some of the principal (also known as the balance).
With an interest-only investment mortgage, the payment you make every month only covers interest, freeing the part that would cover the principal for further investment…
Using an interest only loan is a great idea if you are planning to use money you have saved for further investment, in, for example, another property or properties.
By paying your monthly interest, you have freed up extra cash to make the investment you need for the property or properties so that when you sell them, you not only can pay off your first property, but you can then come away with a tidy profit.
Interest-only loans, while they may seem like a great idea for the financially strapped, aren’t sound practice in the long rung.
At some point you will have to pay down on the principal amount and if you are living on the edge of your funds now, depending on the savings you received from the interest-only investment to pay your bills, then you could wind up with a negative cash flow.
Principle and Interest (P&I) ?
The advantage of the principal and interest loan is that by paying off the balance, you are reducing debt and therefore creating equity.
An interest-only loan should only be used by an investor who needs the spare money to make further investments.
Homeowners who are struggling to keep the roof over their heads and food on the table should not consider this type of loan at all because it will come due and the payments will likely be too high for you to afford in the long run.