The Cash-out Factor

There are drawbacks and trade-offs with almost any kind of mortgage loan you can get. One of the drawbacks for some people with a conventional 30-year fully-amortized loan is that many lenders put severe limitations on the amount of cash that a homeowner can take out of the property at any one time, regardless of how much equity the property may have.

Equity is defined as the difference between what you owe on a property and what that property could reasonably sell for in the current market.

For some people, especially those with large and expensive pieces of property, this limitation on the amount of equity that can be cashed out of a property when you have a traditional fully-amortized loan can be more than just an annoyance, it can interfere with business plans and decisions.

Even though the interest-only loan is now widely-available to almost any borrower, the interest-only mortgage loan was originally designed for wealthy individuals who often wanted to cash-out more equity in a property for which a conventional fully-amortized loan allowed.

Even today, the interest-only loan only has few, if any, limitations on the amount of equity that can be taken out of a property at given time. Therefore, this type of loan is popular with those who plan to use the equity in a property for investments or for other purposes.

With an interest-only loan equity does not build-up from a pay-down of the principal of the loan since there is no pay-down of the principal if the interest-only option is fully exercised. However, equity can build up in a property in a number of ways that have nothing to do with the buy-down of the principal of an underlying mortgage loan.

Equity can be built through improvements made to the property as well as through the natural forces of inflation as well as normal supply and demand considerations. Whatever the means of acquiring equity, the interest-only mortgage allows for easier access to more of that equity than most standard fully-amortized loans.