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
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Home Loans |
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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.
John Waters
Writer
Books on
Lending
Keywords and misspelling: interest only
lones intrest selers byers
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