Interest-Only Loans Remain Popular as 2023 Mortgage Rates Remain Reasonable

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Interest-Only Loans Remain Popular as 2023 Mortgage Rates Remain Reasonable

Another year has come and gone, and Real Estate Investors continue to be optimistic as 2023 begins. Purchases in areas of the country where there is steady growth are proceeding due to the availability of funds including interest-only loans which are popular for investors as well as long-term homeowners, depending on their goals.

While there have been slow and steady rate increases over the past two years, most experts believe they will remain low enough to keep the market moving in a positive direction. Even the most proficient and experienced economists cannot guess where interest rates will be in 2023 so it’s best not to guess and take risks with money you will need in the future for retirement or other expenses.

Interest-only loans are attractive for a number of reasons. They allow borrowers to keep costs low at the start of the term and can offer low payments for as long as ten years. People looking to invest in a property for the purpose of selling after completing renovations and interest-only loans are particularly useful because they usually plan to sell the property within 6 months to a year after closing.

Interest-only loans often offer lower rates than conventional 30-year fully-amortizing loans because the lender doesn’t have to tie up funds for a long period of time.

Many people purchase a property to make it their 2nd home with the possibility of making it their primary residence after a few years. These situations are also perfect for an interest-only loan.

For investors, lower monthly payments allow borrowers to have a better cash flow during renovations which is crucial to their overall goals of making a profit. The number of months that will be interest-only payments should be the same as the expected number of months to complete upgrades to the property as well as the expected time to market it for sale. Once the loan converts to fully-amortizing the payments will increase significantly.

How to Calculate Interest-Only Loan Payments

If you borrowed $300,000 at an interest rate of 5% and you paid interest only for the first year it would work like this:

5% of $300,000 = $15,000 divided by 12 = $1,250.00 per month

6% of $300,000 = $18,000 divided by 12 = $1,500.00 per month

Of course there are taxes, insurance and the possibly a home owner’s association payment to consider in the planning for any property transaction that involves a mortgage. It’s important to speak with a knowledgeable mortgage loan professional to understand the intricacies of every loan instrument and determine if a fixed or adjustable rate is appropriate for your goals. Selecting the term of the loan is also important, as is the possibility of a pre-payment penalty or balloon payment.

Starr Mortgage offers interest-only loans for long-term purchases as well as re-finances, for primary residences, 2nd homes, and investment property. We look at the “big picture” for our clients and guide them to the best option for their goals, then we make the entire process as seamless as possible from application to closing.