Interest Only Loans: What
You Should Know
Of the many different
types of home loans out there, interest only loans are one of the more unusual
types. Although they are not much in use
any more, you may still run into the option.
You should know what they are all about before you even consider one.
Allowing You To Afford
More Than You Really Can
What an interest only loan
basically does is allow you to afford more of a home than you actually can
afford. This trick is pulled off by
allowing you to make monthly payments that are only on the interest portion of
the mortgage. What that means is that
you are not actually paying down the principal balance of the loan, merely
paying the interest. This generally
allows you to have a larger mortgage because the payment is smaller due to the
fact that you are actually paying only the interest.
Any Loan Can Be Interest
Only
An interest only loan is
really not a particular type of loan, but a particular method of making
payments on your loan. You can generally
attach the interest only option to just about any mortgage, if the lender
allows it. When you have an interest
only option on your mortgage, you need only pay the interest portion to stay
current, but you can pay a larger amount if you want in order to pay down
principal.
Higher Interest Rates
Although there are claims
that interest only loans may carry lower interest rates, this is generally
untrue. In fact, you may find the
interest rates are actually higher, because the mortgage company doesn't
usually prefer this method of payment.
There is a higher risk of default on the loan, and so they charge more
interest.
An interest only loan
option can work very well for some people, especially if the market is on the
rise. Even if you pay only interest, if
the value of the house increases you can still gain equity. You run the risk, however, of losing value in
the house and finding yourself paying too little to gain anything in
equity. For this reason, interest only
loans should be approached with caution.