When borrowing money be it for personal reasons, for investment or for a home you need to consider the many options available to you. If you are taking on the daunting task of "going it alone" then you may need to do your research first however if you are using a financial broker or a mortgage broker you will find the answers to your questions there.
One popular loan scenario is a interest only loan and a principal and interest loan. These loans are quite simple to explain and there are different circumstances that a principal only loan would be applicable.
Interest only (IO) loans are simply that. You only pay the interest on the money borrowed. The interest only period is usually set by the lender depending on the product (ie loan option) you choose. At the end of the IO period the loan reverts to a principal and interest loan.
Principal and Interest loans ensure you are paying not only the interest on the loan but a portion of the loan principal. So why take out an Interest Only (IO) loan? The reasons can be many so here is a couple of reasons that may give you cause to take out a loan at interest only.
Financial Hardship: When things get tough and you are struggling to meet your financial commitments your financial adviser, mortgage broker or accountant may recommend an IO loan allowing you to get bug on your feet again.
Investment: Many financial planners and accountants will advise to use an IO loan when purchasing investment properties to minimise your outgoings and to maximise the tax advantages. A mortgage broker will advise you of this option but recommend you speak with your accountant before proceeding.
A principal and interest loan is the most popular of loan options for owner-occupied homes. These loans allow you to pay off your home (principal) and the interest with each repayment. The disadvantage of using an interest only loan for an owner occupied loan would be that at the end of the interest only period (normally 5 years) you would have to make higher repayments at principal and interest than if you had had been paying the principal and interest from the beginning of the loan term.
Here is an example of your repayments on a IO loan during the IO period and after. We have used a fixed rate for this example however lenders may offer an option of variable or fixed rates:
Home loan: $330,000 Loan Term: 30 years Interest rate: 6.5% fixed for 5 years Monthly interest only repayments: $1,625.00. After 5 years with 25 years still on the loan: Monthly principal and interest repayments: $2,025.62. Compare this with a loan of the same interest rate, same loan term and paying principal and interest: $1,896.20 monthly.
When considering an interest only loan it is important you have a chat with your accountant. Whilst a financial broker or a mortgage broker can provide advice your accountant will be able to advise you on your tax implications if any and also provide a second opinion.
Article Source: http://EzineArticles.com/7270624
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