Who Should Get a Interest Only Loan? Compare IO
Loans to Fixed Rate Mortgages (FRMs) and Adjustable Rate Mortgages (ARMs)
Before Deciding
March 20th 2006
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Interest Only
Home Loans |
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Interest Only
(IO) Loans may be practical if you are planning on selling the home
within the next 10 years or less. The payments will typically be
lower than fixed rate mortgage (FRM), but the loans may include a
balloon payment at the end of the term. In other words, if you take
a loan out for $40,000, you may pay interest only for ten years, but
after ten years the loan may be due in full.
Some lenders will
offer IO loans, where after the specified interest only period, the
loan principal can still be paid off in installments. This may
sound better, especially if you are planning to sell your home. You
will have access to the equity at a relatively low monthly cost.
You may want to
consider the difference in cost between a IO loan and FRM before
deciding, assuming there is no balloon payment. This can be done by
adding up all of your payments over the term of the loan.
Typically, the total cost of a FRM will be lower than the IO because
the loan is considered less risky.
There are some
practical considerations for an interest only home loan. When
homebuyers are searching for a home they may wish to keep their
initial payments to a minimum. IO loans are offered as either a FRM
or Adjustable Rate Mortgage (ARM). Of course, if you believe
interest rates will rise, a FRM is better.
The IO loans are
another tool in your mortgage tool-box. This may be the only way
you can qualify. If the IO does not have a prepayment penalty, you
can always refinance your home after time into a non-IO FRM.
Borrowers using
IO loans may increase their purchasing power with affordable monthly
payment, less money down, and an increased cash flow. They may
still enjoy the mortgage interest tax deductions benefits.
According to one IO Loan broker, IO loans are one of the fastest
growing products in the mortgage and real estate markets. Always
consult with loan professionals and financial planners before making
your decision.
By Dan Wilson
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