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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

Who Should Get a Interest Only Loan?  Compare IO Loans to Fixed Rate Mortgages (FRMs) and Adjustable Rate Mortgages (ARMs) Before Deciding

Interest Only Home Loans

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. 

 
 
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By Dan Wilson
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