Are You Being Hoodwinked by Interest Only?

Some borrowers are turning to interest-only loans for the same reason they go for ARMs, lower monthly payments. The interest-only period is typically 5 to 10 years and at the end of that period the loan converts and your monthly mortgage payment is raised to the fully-amortizing level. The new payment will be larger than it would have been if it had been fully amortizing when you first signed for the loan. Some interest-only loans never convert, and, at the end of 30 years, demand a balloon payment for the principal balance. You'll have to have the money for the larger payment or the balloon payment or be qualified to refinance the loan. If you can't hack it, you could suffer not only the loss of the property, but also a serious credit report ding.

Interest Only is an option that can be chosen for most types of mortgages, Fixed or ARMs. The interest only option allows the borrower to make only interest payments. This is usually only allowed for the first 5-10 yrs. Choosing an interest only option can also affect your interest rate. There is usually an add on of 0.25% - 0.5% to the interest rate for interest only payments.

Why pay interest only? - Paying interest only is a great way to minimize housing expenses per month. The concept of this type of payment structure is to allow you a set amount of time in which your payments will be based off of interest only. Every borrower should keep in mind that this loan will not pay down any of the principal balance during the interest only portion of the loan.

Why pay interest only - do you think you will ever really pay off your mortgage? How do you gain equity in your home? Is it from paying down your principal or more so from the market appreciation of your home? When you consider these things paying interest only and having the extra cash flow often makes good sense. Examine every loan option with your mortgage broker before you decide on a interest only loan program. Your mortgage broker will be able to determine if the interest only option is a good fit for you. This will ensure that you are not frustrated by an uninformed decision years down the road. What Hazards Should You Watch Out For? Borrowers can immunize themselves against most deceptions by remembering one critical fact. If two mortgages are identical except that only one has an interest-only option, lenders view that one as riskier. The reason is that, after any period has elapsed, the loan with the IO option will have a larger balance.