An interest-only loan is one in which the borrower’s monthly payments cover only the interest on the loan for a set period of time (usually 5 or 10 years.) Monthly payments do not impact the principal balance during this time. Therefore, during the interest-only time period the borrower is NOT gaining equity in their home. In addition, because interest-only loans are a theoretical risk for lenders, the interest rate and fees are higher than a traditional loan. The idea is to create a “flexible” payment schedule so that the borrower can reduce their monthly payments for periods of time, say if their cash flow fluctuates. Another common reason people consider interest-only loans is to have the ability to afford a more-expensive house, which can be a really bad idea especially if the value of the house declines.
Often interest-only loans are offered to consumers with bad credit to lure them in to the “house of their dreams.” This is a very risky proposition that can result in foreclosure, bankruptcy and a horrible credit standing. As opposed to an interest-only loan, the wiser choice is to focus on credit report repair, and by improving credit you will ultimately have the ability obtain a less-risky traditional loan at a lower interest rate. Also, a traditional loan allows you to gain equity on your home with each mortgage payment. Remember that a higher credit score means a lower interest rate and a lower interest rate means more house for your money. Turning your bad credit around could mean contacting a reputable credit repair services company. For more information visit our website at www.vitessefinancial.com