Interest Only Loans

What are interest only loans? How are they structured and who are they right for? How do you prevent common mistakes people make when choosing interest only loans?

Loans that give you the option of paying only the interest each month are called interest-only loans. These loans let you pay on the principal balance only when you want to or when you decide it is more convenient for you. 

Most Interest-Only, or IO Loans have this option to pay the interest only for a limited period of time, generally from 5 to 10 years. The remaining principal balance comes due at the end of the term. 

IO loans could be a good alternative for borrowers whose incomes tend to change from month to month. 

However, this aspect of an interest only loan could be a disadvantage for borrowers who aren't disciplined enough to pay on the principal of a loan when they are not required to do so.. 

Borrowers who expect to see an increase in their income throughout the term of the loan should consider loans with IO options. First time homebuyers can also be benefitting from interest only loans, if they expect to upgrade from their starter home to a bigger home early. 

Another advantage of interest only loans is that they require lower initial payments, which means borrowers can qualify for bigger loan amounts than loans without interest only options. 

Will your home be your top priority investment, or do you want more cash to direct to other investments that give higher returns? If you invest in stocks or your own business, then an interest-only loan may be the right option for you. Just ensure your investments are yielding a higher return than the interest rate on your IO loan. 

Are you planning to resell your home during the term of the IO loan for a profit? Is the market you are looking to buy in quickly appreciating? If that’s the case, an interest-only loan might be just the right option for you. 

Interest-only loans do have risks, and borrowers must know these risks if they would like to benefit from IO options. What if you do get the increase in income you estimated? What if you can't sell your home later for a profit, or what if the market does not appreciate as much as you predicted? What if the market depreciates? 

There are dishonest lenders out there, and they frequently deceive borrowers when it comes to interest-only loans. One common deception is that lenders lead borrowers to believe that the interest rate on an IO loan is lower than the interest rate on loans without an interest-only option. This is definitely not the case with these loans. IO loans carry higher risks for the lender, so they always have higher interest rates. 

Dishonest lenders sometimes deceive borrowers into thinking that they could avoid buying mortgage insurance by choosing an interest only loan. Again, for the reason that IO loans are high-risk for the lender, the borrower is always required to have mortgage insurance. 

Comparing different types of loans is the most important part when it comes to choosing the best loan for you. Every situation is unique, and comprehending how loans are structured will help you make the right decision. Identify your goals, and you will be able to identify the right loan that will help you reach them.