Are Interest Only Loans With High-risk Costs Worth It?

By: Charley Hwang

When getting a loan you first need to get information to help you navigate the sea of options and select the right product for your needs. At first glance, an interest only loan, or IO, would seem to be the ideal low interest loan as for a period of five or ten years, you pay nothing but interest costs (which, on a low interest loan, can be almost nothing in comparison with traditional mortgages).
Interest-only loans are not a type of mortgage. Interest-only is an option that can be attached to any type of mortgage. Lenders might charge a higher rate for a loan with an interest-only option, because the risk of default is a little higher on loans that amortize more slowly.

These low interest costs lower your payments making it possible for you to purchase a more expensive house or piece of real estate than what you would otherwise been able to feasibly afford and manage to repay.

Is an Interest-Only loan worth the risks? Consider the mortgage payment; traditional mortgage payments are applied first to the interest and then to the principal balance allowing a consumer over time to pay less interest and apply more of their payment to the outstanding balance owed on the mortgage. This is a snowball effect that, especially with fixed rate mortgages, pays off your home in slow but steady segments with no surprises, fees or additional expenses.

In comparison and interest only loan payment is applied only to interest for the first five to ten years. The increasing amount applied to the principal balance to pay the balanced owed is missing. This type of loan leads to a potential short term gain (as you have smaller payments but a long term loss. With an interest-only loan you have just delayed the inevitable repayment of a mortgage you most likely could not afford for 5 to 10 years spreading out a 25 year mortgage to a 30 to 35 year mortgage.

This is bad news for most homeowners, even ones with low interest rates is that after that grace period, the monthly payment jumps significantly and leaves many homeowners in a lurch and on their way to foreclosure. For most consumers the interest only loan is not for them but only knowledge of your personal circumstances as well as the details of the interest only loan you are consider will let you know if this loan is right for you. Please see below for more information on Low Interest Loans.

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