An interest-only loan is one that gives you the option of paying just the interest, or the interest plus as much principal as you want, in any given month during an initial period of time after your closing.
Instead of paying back part of the principal (the loan amount) each month plus interest charges-the most common way mort gages are repaid-these loans require the borrower to pay only the interest for the first five or 10 years. After that, the borrower must either pay the loan off entirely or start paying both principal and interest monthly for the remaining period, perhaps 20 to 25 years.
Interest-only loans have been growing in popularity, especially in the "hot" housing markets, because they enable consumers to "buy up" by paying only the interest portion of the loan in the early years. The loans, which once were aimed at a small pool of affluent borrowers, have gone mainstream.
But the potential risks could be significant, especially if the interest rate on the loan goes up and the required payments of both principal and interest are well beyond the consumer's ability to pay each month.
In general, an interest-only loan may be appropriate for someone whose initial income is somewhat low but is likely to rise quickly in the future. The loans generally are not suitable for a home owner who plans to live in the house beyond the interest-only period (more than five years) and doesn't expect increases in income to rise rapidly enough to cover the higher monthly payments.
Before applying for an interest-only loan, be sure to understand the risks. None of the monthly payment counts toward the actual cost of the home. At the end of the interest-only period, the borrower still owes the full amount of the original loan.
Conversely, an interest-only loan can have certain advantages. Monthly payments are smaller than in traditional mortgages. Some borrowers use the savings for other investments, and the entire payment is tax deductible.
Your loan agent can help you determine if an interest-only mortgage loan is right for you.
East Bridgewater, MA 02333
Lew Corcoran, ASP®, IAHSP, IAHSP-CB