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What Are Interest Only Home Loans? With most home loans the borrower must pay back the principal (the amount that was borrowed) and the interest on it, at the same time. In this way he eventually pays off the whole amount, even though it may take a significant number of years.
At first glance, those not familiar with interest only loans may wonder what having such a loan could achieve. To go on paying the interest and not the principal would not achieve much in the way of reducing the loan.
However, interest only loans are an acceptable way of dealing with a loan for investors especially, because the interest payments are significantly less than if they had to pay both interest and principal. The term of the loan is shorter
- just a few years - and at the end of that time the whole amount of the principal is due.
This would certainly not suit a homebuyer, but for an investor it is great because it gives him time to do a few improvements on the home and re-sell it. He then has enough money to repay the principal in full. Investors are not the only ones to find an interest only loan useful. It can be used as bridging finance, refinancing or home renovations.
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