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What are the advantages of an Interest Only Loan?

The advantage of an interest-only loan is that it allows a borrower to free up capital to invest in assets that yield the highest return, or serve some particular financial-planning purpose, rather than locking it up in a house. For example, you could take the money you'd be paying in principal each month and:

• Pay Down more Expensive Debt such as Credit Cards.
• Set it aside to help pay for a Child's College Fund
• Invest it in the Stock Market over the long haul
• Invest More in your Employer's matching 401(k) Contribution Plan

In the above scenarios, you won't have paid down your mortgage at all, but your financial picture outside your mortgage will be much more robust. Surely, there are plenty of pitfalls in not paying down your principal. For one thing, you'll be building up less equity in your home. On the other hand the amount of equity you build by paying a full payment is very minimal for the first 10 years of a 30 year fixed rate mortgage as you are paying almost 85% in interest to the bank. You have to also consider that you most likely will be accumulating equity as the property appreciates in value over the interest only period. But if you think you live in a market where prices aren't likely to rise much, or might fall, you might want to use the option to pay down some of the principal to give yourself an extra cushion of equity. In summary, an Interest-Only Loan can save you thousands of dollars and possibly earn you thousands more with the right diversified investments over time.

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