What Are Interest-Only Loans?

Interest-only loans are a unique way to borrow money, especially for real estate investors or homebuyers looking for flexibility. With these loans, you pay just the interest for a set period, usually 5 to 10 years, before switching to payments that include both principal and interest.

Why would someone want this? Imagine you’re flipping a property. You plan to renovate and sell it quickly. An interest-only loan keeps your monthly payments low, freeing up cash for the project. Or maybe you’re renting out a property. Lower payments can help you maximize cash flow in the early years while you build equity.

For example, let’s say you borrow $200,000 with a 6% interest-only loan. Your monthly payment would be just $1,000 (6% of $200,000 divided by 12 months). Compare that to a traditional loan with principal and interest, your payment could be $1,200 or more. Those savings can make a big difference when every dollar counts.

But, there’s a catch. After the interest-only period ends, your payments will go up, sometimes a lot. That’s why it’s important to have a solid plan for what comes next.

Interest-only loans aren’t for everyone, but when used wisely, they can be a great tool to reach your goals. Want to know if this type of loan fits your situation? Keep reading for the pros, cons, and how to decide.

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