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Interest Only Loans When To Use Them and How Do They Work? Owners Will Carry These Mortgages - Benefits both Seller and Buyer  

July 21st 2006

Interest Only Loans  When To Use Them and How Do They Work? Owners Will Carry These Mortgages - Benefits both Seller and Buyer  

Home Loans

If you have been shopping for a home loan you have probably seen ads for interest only (IO) loans.  What are these loans and are they advantageous?  This may depend on whether you plan on living in the house for a long time or anticipate an increase in your income. 

Interest only loans give you the option to pay interest only for a limited time, usually 5 to 10 years.  At that time the loan amount may become due and payable.  This is called a balloon payment.  Some loans may convert to a conventional loan with interest plus principal.    


Here is an example: You get a loan that is interest only for 10 years.  After this period the loan converts to a conventional loan for the remaining 20 years.  Since you are paying interest only, the minimum payments are much lower than a conventional fixed or adjustable rate mortgage, making it easier to qualify for the loan. 

If you expect home prices to increase and are planning on selling your home within 5 or 10 years, interest only loans can make a lot of sense.  The loans will keep your expenses low while you fix the house up and prepare it for sale. 


Homeowners may consider carrying this type of loan on a house for sale as well.  For instance, when there is a death in the family, one of the assets left may be a home.  The home may not qualify for a loan because of plumbing problems, electrical problems or it may not be up to code.  The family members may not want to take the time involved in fixing the home up. 

One option is to sell the home to someone that is willing to do the work themselves, and carry the loan yourself, offering an IO mortgage with a balloon payment.  This gives the buyer time to fix the home up so that it can qualify for a loan.  At the end of the IO loan period the buyer can get a conventional loan on the property and pay you off.  Always have a professional draw up the documents. 

There are risks for the borrower in IO loans.  Understand and read the terms of the agreement first.  Expect to pay a higher interest rate because the lender is assuming more risk.  Lenders will also require the buyer to pay mortgage insurance. 

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John Waters

Books on Lending

Keywords and misspelling: interest only lones intrest selers byers

Important:  The material on Best Syndication is for informational purposes only and is not meant to be advice. You should always seek professional advice before making financial decisions. 
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