Arnold
CibbuanoMortgages - Interest Only Loan
July 14th 2006 00:14
I think it’s high time I started looking at some financing aspects of real estate considering few of us have the capital to buy any sort of real estate without some sort of financial loan. There are a bunch of mortgage and financing option out there. Today I’m going to look at the interest only loan which seems to be the latest craze when it comes to financing a property purchase and dealing with the resulting mortgage. First lets look at what an interest only loan is.
An interest only loan is a lending scheme where by you borrow a certain sum of money from a lender. This is often referred to as the principle. Traditionally when you pay off a loan, the bank charges an interest rate to the loan amount which is remains owed to the lender. The amount that you have to repay is calculated to gradually chip away at the loan amount and interest payable so that after a period of time, say 20 years, you’ll have totally paid the initial borrowed amount plus all the interest that has accumulated over the loan term. After say 20 years, you will be completely debt free and have rightfully paid for your property.
An interest only loan differs in that your repayments are reduced to only cover the interested calculated on the principle. Following this repayment method means that you’ll never reduce the monetary amount that you have borrowed from the financial lender. The interest is always calculated from a constant principle value, the initial borrowed amount. This means that your repayments will be much lower than someone following the aforementioned repayment scheme, however, after 20 years, you will remain in debt to a value of the loaned initial amount. An interest only loan means that you will never actually pay off your mortgage until you cash in on the investment and resell.
On the face of things, the interest only loan appears to be a bad option. Why would you want to maintain a substantial debt? It almost seems that after 20 years you’ve made a bunch of repayments and have nothing to show for those squandered repayments. But, that’s not the full picture. It’s all about what is happening to that reserve cash that you’re not spending repaying the mortgage that is important. Provide you are still getting a rate of return that is in excess of the rate that you are being charged, you should remain in the clear. Basically, the crux of the question in deciding whether to take out an interest only loan is the decision as to whether you can earn a better return in other investments other than your property. What the interest only loan does is free up additional money so that you can spend it on other interests.
Come back Monday for some more discussion about interest only loans, some of the steps you should take before signing on the dotted line and some of the advantages and disadvantages of an interest only loan.
An interest only loan is a lending scheme where by you borrow a certain sum of money from a lender. This is often referred to as the principle. Traditionally when you pay off a loan, the bank charges an interest rate to the loan amount which is remains owed to the lender. The amount that you have to repay is calculated to gradually chip away at the loan amount and interest payable so that after a period of time, say 20 years, you’ll have totally paid the initial borrowed amount plus all the interest that has accumulated over the loan term. After say 20 years, you will be completely debt free and have rightfully paid for your property.
An interest only loan differs in that your repayments are reduced to only cover the interested calculated on the principle. Following this repayment method means that you’ll never reduce the monetary amount that you have borrowed from the financial lender. The interest is always calculated from a constant principle value, the initial borrowed amount. This means that your repayments will be much lower than someone following the aforementioned repayment scheme, however, after 20 years, you will remain in debt to a value of the loaned initial amount. An interest only loan means that you will never actually pay off your mortgage until you cash in on the investment and resell.
On the face of things, the interest only loan appears to be a bad option. Why would you want to maintain a substantial debt? It almost seems that after 20 years you’ve made a bunch of repayments and have nothing to show for those squandered repayments. But, that’s not the full picture. It’s all about what is happening to that reserve cash that you’re not spending repaying the mortgage that is important. Provide you are still getting a rate of return that is in excess of the rate that you are being charged, you should remain in the clear. Basically, the crux of the question in deciding whether to take out an interest only loan is the decision as to whether you can earn a better return in other investments other than your property. What the interest only loan does is free up additional money so that you can spend it on other interests.
Come back Monday for some more discussion about interest only loans, some of the steps you should take before signing on the dotted line and some of the advantages and disadvantages of an interest only loan.
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