Principal and Interest Vs Interest Only
Last updated on December 20th, 2022
The benefits of a principal and Interest home loan Vs Interest Only Loan
A principal and interest home loan, also known as a traditional mortgage, is a type of loan in which the borrower repays both the principal (the amount borrowed) and the interest on the loan over a specified period of time. In contrast, an interest only loan is a type of loan in which the borrower only repays the interest on the loan for a set period of time, typically five to ten years. After this initial period, the borrower must begin repaying both the principal and the interest.
One of the main benefits of a principal and interest home loan is that it helps to build equity in your property over time. As you make your monthly payments, a portion of the payment goes towards repaying the principal, which means that you gradually own a larger share of your home. This can be beneficial in a number of ways. For example, if you decide to sell your home, you will have more equity to put towards the purchase of your next home or to invest in other opportunities. Additionally, having a larger amount of equity in your home can also provide a financial cushion if you encounter unexpected expenses or a drop in income.
Another benefit of a principal and interest home loan is that it can be easier to budget for and manage your monthly expenses. With a traditional mortgage, your monthly payment stays the same throughout the life of the loan, which means that you can plan ahead and know exactly what your housing costs will be each month. In contrast, with an interest only loan, your monthly payment will only cover the interest on the loan, so it will be lower at the beginning of the loan term. However, once you begin repaying the principal, your monthly payment will increase, which can be a financial strain if you are not prepared.
Three benefits of a principal and interest loan:
First, a principal and interest loan can help you pay off your mortgage faster. Because you are making regular payments toward the principal amount borrowed, each payment you make will chip away at the total amount you owe. This can help you pay off your mortgage in a shorter period of time, potentially saving you thousands of dollars in interest over the life of the loan.
Second, a principal and interest loan can provide you with more stability and predictability in your monthly mortgage payments. With an interest only loan, your monthly payments will only cover the interest charged on the loan. This means that your monthly payments will remain relatively low for the initial period of the loan. However, once the interest only period ends, your monthly payments will likely increase significantly as you begin to pay off the principal amount borrowed. This can make it difficult to budget and plan for your future expenses.
Third, a principal and interest loan may be a better option if you are planning to stay in your home for a long period of time. Because you will be paying off both the principal and the interest on the loan, the total amount you owe will decrease over time. This can help you build equity in your home, which can be useful if you decide to sell in the future or take out a home equity loan.
Not sure which home loan is for you? Principal and Interest Vs Interest Only ? Speak to a mortgage broker today and get expert advice >
