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The majority of pure interest rate mortgages only require interest payments for a certain period of time, for example five years. A pure interest rate loan is an option that can be tied to any mortgage. Find out more about the advantages and problems of an interest only loan.

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Interest-only loans are loans in which the borrowers only repay interest for part or all of the duration of the loan, with the interest rate remaining constant during the pure interest rate time. By the end of the pure interest rate horizon, the Mortgagor must, at the Borrower's discretion, re-negotiate another pure interest rate mortgages, repay the Principal or, if previously arranged, transform the Loan into an (amortized) Repayment and Interest Loan.

A five - or ten-year pure interest rate horizon is typically used in the United States. At the end of this initial investment the main difference is amortised over the remainder of the year. This means that if a debtor had a 30-year loan and the first ten years were only interest, the capital amount would be amortised at the end of the first ten years for the remainder of the 20-year horizon.

In practice the early payment (in the pure interest period) is significantly lower than the later payment. It gives the borrowers more latitude as they are not obliged to make payment to the lender. In fact, it also allows a borrowing party who anticipates a significant pay rise in the course of the loan to lend more than the borrowing party would otherwise have been able to provide, or an investor to create cash flows if they would not otherwise be able to.

The loan will not fall during the pure interest years of the loan, unless the lender makes extra repayments to the lender. With a traditional amortising mortgages, the proportion of a disbursement that counts for the capital is significantly lower than the proportion that counts for interest in the first few years (the same timeframe that counts only for interest).

Only interest-linked credits pose a slightly higher level of exposure for creditors and are therefore somewhat higher. Coupled with little or no down payments, the diversity of pure floating interest mortgage (ARM) products is sometimes an indication that a purchaser is taking too much credit exposure - especially if it is unlikely that this purchaser will be able to fit into more consistent credit frameworks.

Given that a landlord does not form capital in a pure interest rate loan, he may be negatively affected by the predominant economic environment at the moment of the borrower's willingness to buy or re-finance the home. Borrowers cannot finance the higher regular amortised repayments at the end of the pure interest rate term, cannot obtain refinancing for want of capital and cannot resell if there is a weakening residential space requirement.

Because of the spectacular nature of reliance on the valuation of home ownership, which may or may not occur, many finance professionals, such as Suze Orman, discourage pure interest rate lending for which a borrower would not otherwise be eligible. Plain interest rate lending based on house value growth would be the type of redemption loan that most banks stopped in mid-2008.

Interest only lending is a beloved way to borrow to buy an asset that is not likely to write off much and that can be resold at the end of the loan to pay back the principal. During the 1980' and 1990' it was a favourite way in the UK to buy a home, to buy an interest-only loan combined with a life insurance plan, known as a donation mortgages.

House owners were said that life insurance would pay for the mortage and also pay a flat-rate amount. Much of these life insurance products were poorly administered and were unable to keep the promises, some of which did not even pay the costs of the loan. As a result of this mis-selling, coupled with the bad share price performances of the latter 90s, foundation loans have become less popular.

Following the arrival of retail bankers in the country's former nationalised dominant financial services industry, pure interest rate lending was used. Such credits are granted on condition that the debtor provides the institution with a securities (such as gilt ornaments) or equivalent documentation (such as mortgage bonds). Bullion loan are the most frequent pure interest rate loan in India.

Yahoo Finance - Loans ^ Yahoo Finance ^ Loans ^ Amromin, G.; Huang, J.; Sialm, C. (2007). "Compromise between advance payments on mortgages and accrued income capital".

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